The Financial Times reported Thursday, citing five confidential sources, that while the fall in Brent crude futures below $40 this week has caused jitters in Saudi Arabia, the kingdom will keep its production levels intact.
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Brent prices have not been below $40 since the start of June.
As of 5:36 am, Brent was trading 1% lower at $40.22.
Saudi Arabia also cut production by an extra 1 million barrels per day in June to shore up prices. According to the latest monthly OPEC report, Saudi produced around 8.4 million barrels per day in July.
But sources told the FT that Riyadh is reluctant to cut output further, especially given its position as effective leader of the so-called “OPEC+” exporter group, that includes the 13 members of the Organization of the Petroleum Exporting Countries, as well as other major producers such as Russia, Oman and Kazakhstan.
Here are three reasons why Saudi Arabia is unlikely to cut production:
Saudi Arabia reportedly is concerned if it cuts output, it would surrender market share to rival exporters and undermine the OPEC+ agreement to reduce production by 7.7 million barrels per day until December, down a previously agreed record 9.7 million barrels per day.
Brent prices took a beating in April as coronavirus lockdowns torpedoed demand for fuel. While Brent prices fell roughly from a closing price as high as $59.31 at the start of March to just above $19 April, US crude prices briefly fell to as low as -$40 a barrel.
OPEC and its partners agreed to curb output by 9.7 million barrels in May and June, but a number of members were slow to adhere to the deal, such as Iraq and Nigeria.
The group reached a deal in July to extend production until August followed by a commitment from the bloc’s second biggest member Iraq, to stick to its agreed targets, with a cut of 400,000 barrels a day in August and September.
But Helima Croft, who is head of commodity strategy at RBC Capital Markets, said in an interview with Business Insider in July “cheating” by smaller laggard nations would still be on the cards.
More worryingly for Riyadh, the UAE, which has traditionally been a staunch ally, said last week it had produced above its agreed quota. After having adhered to OPEC production agreements for almost four years, this poses a problem for Saudi Arabia, which has publicly put pressure on the likes of Iraq and Nigeria for quota-busting.
Saudi Arabia is not willing to undermine the OPEC deal as it remains in everybody’s interests for the deal to remain in place.
Anas Alhajji, who advises oil-producing governments, told the FT any further cuts by Saudi Arabia would “complicate OPEC’s dynamic”. “How do you convince countries that are already struggling to make additional cuts to make even deeper ones? It is in everyone’s interest for OPEC+ to stay the course,” he added.
“Despite the recent slide in oil prices, we think that the OPEC+ leadership will continue to direct its efforts towards securing better compliance rather than pushing for deeper cuts at this stage,” RBC’s Croft said.
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