LAUNCESTON, Australia, July 4 (Reuters) – The decision by Saudi Arabia and Russia to extend their voluntary output cuts is more likely to be viewed as a bearish signal for prices, as it confirms that optimistic views on demand growth are faltering.
Saudi Arabia, the world's biggest crude exporter, said on Monday it will extend its voluntary production cut of 1 million barrels per day (bpd) for July into August, and flagged that the reduction could continue for further months.
Russia, the No. 2 oil exporter, said shortly after the Saudi announcement that it would cut crude shipments by 500,000 bpd for August.
Taken together, the Saudi and Russian moves mean that the total output cuts pledged by members of the OPEC+ producer group are 5.16 million bpd, or about 5% of daily global demand.
The Saudis stuck to their usual script of saying the additional output cut was needed for the "aim of supporting the stability and balance of oil markets."
The subtext to Saudi calls for stability and balance is that the kingdom wants to keep oil prices at a level it deems high enough. While that level isn't publicly disclosed, most market watchers and analysts believe a price anchored around $80 a barrel is the goal.
The Saudi and Russian moves did briefly send benchmark Brent crude futures higher, with the front-month contract gaining as much as 2.3% during Monday's trading, reaching an intraday high of $76.60 a barrel.
But by the close of trade the contract was at $74.65 a barrel, down 0.3% from the close of $74.90 on June 30.
The market reaction shows the broader context. Oil market investors no longer believe in the bullish scenarios for crude demand growth this year, which are still the formal position of the Organization of the Petroleum Exporting Countries and the International Energy Agency.
Much of the expectations for an increase in global oil demand of more than 2 million bpd this year centred around China's economic rebound, which was supposed to account for the lion's share of the total growth.
But China's recovery has been patchy and uneven, with some sectors such as retail sales performing somewhat strongly, but others such as property construction and manufacturing disappointing.
China's official manufacturing purchasing managers' index (PMI) stayed in negative territory in June, although it did improve to 49.0 from 48.8 in May.
It has now been below the 50-point mark that separates expansion from contraction for the past three months after a strong start to 2023, when it rose as high as 52.6 in February.
The question for the oil market is whether China's run of soft economic outcomes will eventually translate into weaker crude imports, especially if the rest of the world also continues to see economic weakness.
China's crude imports have been robust in recent months as refiners ramped up throughput to take advantage of pent-up domestic travel demand as COVID-19 restrictions ended, as well as strong fuel exports as Beijing sought quick economic growth.
Imports were up 6.2% to the equivalent of 11.13 million bpd in the first five months of 2023 from the same period last year, according to official customs data.
The strong trend is likely to have continued in June, with Refinitiv Oil Research estimating arrivals of 12.5 million bpd, which would be the third-highest on record.
The allocation of additional crude import permits is a factor that could keep crude imports strong in the second half, but it's likely that much will depend on crude prices.
China has a track record of buying strong volumes when refiners deem prices to be reasonable, but cutting back on imports when prices are viewed as having risen too high, or increased too quickly.
China has also been boosting inventories so far in 2023, with an estimated 730,000 bpd added in the first five months, with a massive 1.77 million bpd being added in May.
This level of stockpile building gives China's refiners options should crude oil prices rise as OPEC+ cuts output.
In effect, China and Saudi Arabia and Russia may be engaged in a game of chicken.
If the Saudis and Russians are successful in boosting crude oil prices, the Chinese have the option to dial back imports, which in turn would force further output cuts in order to maintain prices.
On the other hand, if prices remain under $80 a barrel, Chinese refiners may be happy to continue the robust import volumes of recent months, especially if they can export refined fuels at reasonable profit margins.
The opinions expressed here are those of the author, a columnist for Reuters.
Our Standards: The Thomson Reuters Trust Principles.
Thomson Reuters
Clyde Russell is Asia Commodities and Energy Columnist at Reuters. He has been a journalist and editor for 33 years covering everything from wars in Africa to the resources boom and its current struggles. Born in Glasgow, he has lived in Johannesburg, Sydney, Singapore and now splits his time between Tasmania and Asia. He writes about trends in commodity and energy markets, with a particular focus on China. Before becoming a financial journalist in 1996, Clyde covered civil wars in Angola, Mozambique and other African hotspots for Agence-France Presse.
Two New Jersey firefighters were killed while battling an intense blaze on a cargo ship docked at Port Newark, officials said on Thursday, and TV footage showed some smoke continuing to billow from the vessel.
Canada's main stock index opened lower on Thursday, with energy and mining stocks leading declines as minutes from the U.S. Federal Reserve's June meeting sparked concerns of more interest rate hikes.
Dabur India Ltd said on Thursday it estimated that first-quarter sales increased more than 10%, as easing inflation allowed customers to spend more on the consumer goods company's products.
Reuters, the news and media division of Thomson Reuters, is the world’s largest multimedia news provider, reaching billions of people worldwide every day. Reuters provides business, financial, national and international news to professionals via desktop terminals, the world's media organizations, industry events and directly to consumers.
Build the strongest argument relying on authoritative content, attorney-editor expertise, and industry defining technology.
The most comprehensive solution to manage all your complex and ever-expanding tax and compliance needs.
The industry leader for online information for tax, accounting and finance professionals.
Access unmatched financial data, news and content in a highly-customised workflow experience on desktop, web and mobile.
Browse an unrivalled portfolio of real-time and historical market data and insights from worldwide sources and experts.
Screen for heightened risk individual and entities globally to help uncover hidden risks in business relationships and human networks.
All quotes delayed a minimum of 15 minutes. See here for a complete list of exchanges and delays.
© 2023 Reuters. All rights reserved