By K Raveendran
Saudi Arabia and Russia have surprised global oil markets by extending their voluntary production cuts until the end of the year, sending crude prices to 10-month highs, something that was least expected.
Saudi Arabia announced it will extend the 1 million bpd voluntary cuts until December 2023. Russia followed suit, making a similar announcement that its voluntary cut of 300,000 bpd will continue till the end of the year.
The development was a clear indication that prices would trump volumes for both the countries. The bullish moves are seen to significantly tighten the global oil market and can only result in one thing: higher oil prices worldwide. The decisions surprised oil markets, and prices reacted strongly and suddenly following the announcements.ICE Brent front month jumped from $88.5 per barrel to over $90.5 per barrel, the highest price since November 2022.
Analysts are now predicting that global liquids demand will surpass supply by around 2.7 million bpd in the further quarter of this year. But it will have implications for the revival of the global economy, which continues to show several downside risks albeit amidst some positive developments.
Rystad Energy experts are wondering whether the Saudis won’t be worried about global demand in the final quarter of 2023, particularly in China, so that they need to take preempted measures. Chinese macroeconomic sentiment is a potential downside risk, but the agency’s latest mobility indicators do not show an imminent deceleration that could justify such a move by Saudi Arabia.
The impact these cuts will have on inflation and economic policy in the West is hard to predict, but higher oil prices will only increase the likelihood of more fiscal tightening, especially in the US, to curtail inflation. Western leaders, wary of an oil price spike, could explore import adjustments or open diplomatic discussions to help mitigate the impact and tame inflation.
The extension of this longer cut until December implies a significant shift in balances. Moreover, this would lead to the highest semi-annual deficits since the second half of 2021 but with the added pressure of starting from much lower stock levels both for crude and products. In China, services PMI figures showed a slowdown in activity levels, adding to the concerns about the Chinese economic recovery and its impact on oil demand. Traders could remain focused on any new measures from the Chinese government to boost the economy before taking a view of how the market is headed.
In the Eurozone, PMI figures showed a faster-than-expected decline in economic activity which could affect demand expectations from the area. The eurozone continues to see weak economic growth and high inflation and remains exposed to the ECB’s monetary policy. The European Central Bank could raise interest rates again to fight inflation and could affect demand for oil in the process.
Inflation has been pushing up drilling and completion costs and contributing to a rise in capital expenditure, while muted oil prices are dampening cash flow. Capital expenditure among the peer group has risen for 10 straight quarters, reaching $9.7 billion in the second quarter of this year, up from $7.8 billion over the same period in 2022. After investments peaked timing with the spike in oil prices on the back of Russia’s invasion of Ukraine, there has been a steady decline.
Spending on conventional oil and gas exploration is growing and expected to top $50 billion this year, the highest since 2019, but operators are still waiting for the results they had hoped for. According to Rystad, despite the rising investments, discovered volumes are falling to new lows.
Estimates show that in the first half of 2023, explorers found 2.6 billion barrels of oil equivalent, 42 percent lower than the first half of 2022 total of 4.5 billion. Fifty-five discoveries have been made, compared to 80 in the first six months of last year. This means discoveries in 2023 have averaged 47 million barrels, lower than the 56 million barrels per discovery for the same period in 2022.
In the hunt for new resources, exploration companies are prioritizing the offshore sector, trying to capitalize on underexplored or frontier areas to unlock new volumes through high-risk, higher-cost offshore developments. The offshore industry accounted for about 95 per cent of exploration spending this year to date but only about two-thirds of discovered volumes. (IPA Service)