Oil: Saudi maneuver itself won’t bring $80-$90 a barrel – Citi

Investing.com — Saudi Arabia’s 1-million-barrels-per-day oil cut that will reduce its output by 20% in total in July won’t by itself bring a barrel to between $80 and $90, Citigroup’s analysts said in an energy note issued Tuesday.

“It would take surprisingly better coordinated action among OPEC+ producers to tighten markets, if that is their wish,” the note said. “The likelihood that Saudi Arabia would tackle this on its own on a sustained basis is quite low.”

Citi’s analysts added that the Saudi cut itself is “unlikely to raise oil prices into high $80s/low $90s (as) weak fundamentals point to lower prices by (the) year-end.”

Oil revenue is the lifeblood of the economies in OPEC, or the Organization of the Petroleum Exporting Countries, a 13-member Saudi-led group whose main objective is to be the price-setter of the commodity. Ten other oil producing states, including Russia, that aren’t OPEC members have also been keeping their output closely in line with the group’s for the sake of price. The 23-nation alliance is collectively known as OPEC+. Over the past eight months, OPEC+, led by Saudi Arabia has announced two production cuts totaling 3.7 million barrels per day, without much to show in prices.

After another meeting of the alliance on Sunday, Saudi Arabia said the kingdom’s own oil output will drop to 9M barrels per day in July, as it accounted for the additional million barrels per day it will cut amid active summer travel and energy consumption in the Northern Hemisphere. Since October, the Saudis have already been producing 1.5M barrels below their regular average daily production of 11.5M. Their latest maneuver appeared aimed at lifting from the low $70s and global benchmark from the mid $75 levels.

Citi’s analysts, however, said demand — or rather the lack of it — was the real problem in the oil market and achieving commensurate balance with supply will be difficult to keep crude consistently at $80-$90 per barrel for both the first and second halves of this year, as well as in 2024.

“Taking into account adjustments on both the supply and demand side seen in the full supply-demand balances…we see average quarterly prices fairly range-bound for the year, averaging $81 for Brent in both 1H and 2H but with the potential to range between $72 and $90,” the Citi note said.

“In our base case for 3Q 2023 (50% probability), we assume that the Saudi cuts of ~1-m b/d are made only for the month of July, in which case we are looking at and expecting virtually no stock change for 1H’23, and a stock draw of 500-k b/d in Q3 and a stock build in Q4 of 800-k b/d.”

“The Q3 draw is lower than what is seasonally normal for summer, and the build in Q4 would reflect growing weakness on the demand side against stronger performance from non-OPEC on the supply side.”

Citi said a more bullish result, with a 20% probability, would come from Saudi Arabia maintaining its lower production of 9M barrels per day through the third quarter, bringing average prices to $88 based on the projected stock draw of 1.1M barrels daily for the quarter.

“There are other bullish possibilities to consider as well, but we think these are lower probabilities than a longer Saudi cut,” the note said. “These would include disruption risks from countries like Iran, Iraq, Libya or Nigeria, or a far more robust growth in demand than we forecast, although higher demand would almost certainly result in a shorter time frame for the Saudi cut.”

On the contrary, Citi assigned a higher 30% probability to its bearish case for oil, which it said would stem from more significant economic weakness that included potential recessions in the United States and Europe, and lower growth in China and world trade overall.

“In our bearish case we also include more leakage from OPEC+. It is notable that Saudi Arabia alone is making cuts and none of the other members of the group volunteered to decrease output. It might be hard to find a way to keep all those with shut-in or growing capacity from putting oil in the market. Our base case for 2024 is essentially bearish.”

“We paint a picture of the OPEC+ countries not keeping their production cuts through next year, but to make a point about the growing spare capacity in the system, we add back all of the cuts that we can identify. We do not have Saudi Arabia or the UAE producing to anywhere near their growing capacity. Still, the result is an inventory build for the year that averages +2.1-m b/d, given our projection of even weaker demand growth in 2024 than in 2023.”

Next year, Citi’s analysts said, will likely see a demand growth of some 200,000 barrels per day, but more limited to petrochemical feedstock and jet fuel, due to a potential U.S. recession and an initial demand spurt of some 900,000 barrels daily in China.

“When we look at the more bullish case of OPEC+ countries maintaining their cuts for 2023 through 2024 with the exception of the incremental 200-k b/d awarded the UAE as part of the current agreement, the overall picture looks quite bullish, with an average draw of 0.2-m b/d on an error-term adjusted basis.”

“Yet if we add back the error term adjusted, stock builds would average 1.1-m b/d for the year as a whole. That might imply that no matter how hard the group has worked this year to rein in output, 2024 might still remain bearish and muted.”

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