‘OPEC+ gambles that crude isn’t too expensive to crimp demand’

Launceston, Australia — Saudi Arabia and Russia, the de facto leaders of the OPEC+ group of oil exporters, have extended their voluntary production cuts to at least the end of this year, a move that sets up a delicate balancing act for the global crude market.

There is no doubt that by removing about 1.3 million barrels per day of output, the Saudis and the Russians have tightened the global market and boosted prices.

Saudi Arabia said on Wednesday it will keep its extra 1 million bpd production cut in place until the end of 2023, while Russia said separately it will maintain its reduction of 300,000 bpd until the end of December.

The announcements by the two biggest exporters in the OPEC+ group came ahead of a ministerial panel meeting of the group, at which they made no changes to their output policy, meeting market expectations for a steady outcome.

The trick for the Saudis and the Russians is whether the global economy can withstand an oil price closer to $100 a barrel than the $70 level that prevailed in the middle of 2023.

It’s too early to make a definitive call on this, but there are some early signs that demand may start to fall as high retail prices renew inflation fears and dent consumer spending and confidence.

Global benchmark Brent crude futures slumped on Wednesday, ending 5.6% lower at $85.81 a barrel, the lowest close in just over a month.

The decline was unrelated to the OPEC+ news, rather it was driven by signs of weak demand for gasoline in the United States, the top consumer of oil products.

Finished motor gasoline supplied, a proxy for demand, fell last week to about 8 million bpd, its lowest since the start of this year, the U.S. Energy Information Administration said on Wednesday.

While some of the demand destruction can be blamed on severe weather across several states, analysts at JP Morgan noted that seasonal U.S. gasoline consumption is at the lowest level for 22 years.

ASIA DEMAND
There are also concerns that demand weakness may be starting to appear in Asia, the top-importing region and home to China, the world’s biggest crude importer, and India, the third-biggest buyer.

Asia’s crude oil imports dropped to 25.05 million bpd in September, the weakest outcome this year and down from 25.22 million bpd in August and 27.92 million bpd in July, according to data compiled by LSEG.

That’s a relatively small decline, but it’s worth noting that the impact on crude imports from the strong rally in prices from July onwards is likely to show up in imports only from October onwards, given the lag between when cargoes are arranged and physically delivered.

Retail fuel prices are controlled in many major Asian countries, but this hasn’t prevented some of crude’s strength being reflected in higher pump prices.

China’s retail gasoline price has risen from 8.06 yuan ($1.15) a litre at the end of June to 9.04 yuan currently, an increase of 12%.

Australia, which has a market-linked pricing structure, has seen retail gasoline prices rise jump 21.4% from the start of July to an average of A$2.11 ($1.34) a litre in the week to Oct. 1, according to data from the Australian Institute of Petroleum.

The outlier is India, where retail prices have been kept steady despite being market-linked, at least in theory.

In practice India’s retail market is dominated by state-controlled refiners, which are sensitive to political imperatives.

The retail price of gasoline in the capital New Delhi is currently 96.76 rupees ($1.16) a litre, a level that has persisted since April last year.

While this is down from the 2022 highs around 106 rupees a litre, it’s worth noting that the price traded below 80 rupees for most of the decade up until the COVID-19 pandemic struck in 2020.

There is also the question as to how long the government can strong-arm refiners to sacrifice profits in order to keep retail prices low, especially given that the discounts on the Russian oil that India has increasingly imported have narrowed recently.

Overall the risk for the Saudis and the Russians is that their additional output cuts keep prices high enough to lower demand, forcing them into making further reductions, or accepting a weaker crude price.

The opinions expressed here are those of the author, a columnist for Reuters.

*Clyde russel, editing: Sonali Paul – Reuters