Crude sank into bear territory last month amid concerns the cutbacks by OPEC, Russia and other allies are being partially offset by a rebound in U.S. shale production. There’s also the small matter of a vast inventory surplus built up during three years of oversupply. While stockpiles in the industrialized world have fallen, they remained 292 million barrels above the five-year average in April, according to the International Energy Agency.
“For some time we’ve been saying OPEC needs to step up,” said Amrita Sen, chief oil analyst at Energy Aspects Ltd. “Saudi Arabia’s exports were up in June, and this is not what the market wants to see at all. Exports need to come down further.”
Saudi production increased by 90,000 barrels a day to 10.02 million a day in June, according to a Bloomberg survey. It was the biggest increase in almost a year and leaves their output 150,000 barrels a day higher than in January, when the kingdom explicitly cut more than needed as a symbol of commitment to the deal.
While output typically climbs during the summer months as crude is burned to meet surging domestic electricity demand for cooling, the kingdom’s exports jumped even more, by 320,000 barrels a day, according to ship tracking by Bloomberg.
Saudi Arabia reduced prices for most of its crude sales to Asia in August, showing that it doesn’t want to surrender market share in the region despite the commitment to cut output, Sen said.
“I do still believe they mean ‘whatever it takes,’ but the market is impatient and wants to see larger stock draws,” said Torbjorn Kjus, chief oil analyst at Oslo-based bank DNB ASA. Saudi exports have been falling and will continue to do so in the third quarter, he said.
Monthly fluctuations in output or exports matter less than overall compliance for the duration of the deal, which remains on track, said Jason Bordoff, director at the Center on Global Energy Policy at Columbia University.
Over the first half of the year, the 11 OPEC members bound by the output curbs were fully compliant with their pledges, the Bloomberg survey showed. However, a big part of that effort was undone by the resurgence of Libya and Nigeria, OPEC members exempt from the cuts that together have added 440,000 barrels a day of production in the last two months.
This problem was becoming apparent when OPEC met in Vienna in May, but the group went no further than agreeing to prolong the existing cutbacks to the end of March.
It’s the reluctance of Russia and OPEC-member Iraq to curb their output further that’s probably holding Saudi Arabia back, said Bob McNally, president of consultants the Rapidan Group LLC.
“Their commitment to the letter of the Vienna deal has been exemplary,” said McNally. “A real supply manager would be cutting supply further, but Riyadh understandably refuses to do so without collective contributions.”
Russia would oppose deeper curbs if they were suggested when producers meet in St. Petersburg this month, according to four government officials. Iraq sees no need for steeper reductions for now, Oil Minister Jabbar Al-Luaibi said this week.
By not cutting deeper, Saudi Arabia may be serving its other objectives, particularly as the country grows increasingly wary of giving any more price support to the resurgent U.S. shale-oil industry, said Helima Croft, head of commodity strategy at RBC Capital Markets LLC.
“Was there really a lot of urgency in Riyadh to rescue the price — and investors and U.S. producers — this summer?” said Croft. “I just have the sense that Khalid al-Falih thinks he has done enough and has a different timeline.”