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By David Gaffen, Editor, Energy Markets

Hello Power Up readers! OPEC ended up taking a big swing this weekend, with Saudi Arabia agreeing now to cut its output to the lowest since during the COVID-19 pandemic, and the producing group overall squeezed production targets for 2024 to a level guaranteed to tighten the markets. This is what everyone is talking about, so let’s get at it first. 

Today’s top headlines:

• Brent may rise toward $100/bbl as Saudi output cut could worsen supply gap
• COLUMN: Saudi Arabia’s solo play shows mess of oil market contradictions
• EXPLAINER: Why is OPEC+ cutting oil output?

That’s Saudi Arabia’s Minister of Energy Prince Abdulaziz bin Salman Al-Saud at the OPEC meeting in Vienna, on the prowl for short-sellers. REUTERS/Leonhard Foeger

The Organization of the Petroleum Exporting Countries and their allies have grown tired of speculators of late – and so they acted, with Saudi Arabia agreeing to cut output by 1 million barrels per day (bpd) now, while the group overall reduces output by another 1.4 million bpd beginning in January 2024.  

There are a few reasons for this, as our OPEC team reports here. For one, oil prices have not responded in the way OPEC has wanted to surprise cuts in April, settling in the low $70s per barrel. The weakened economic outlook and China’s stop-start recovery has tempered gains. Plus, some countries like Russia and Nigeria are already falling short of their targets, so this move just reflects the existing reality. 

But Saudi Arabia made it clear that speculators are at top of mind here. “”We wanted to ice the cake. We always want to add suspense,” Saudi Energy Minister Prince Abdulaziz bin Salman told a news conference. “We don’t want people to try to predict what we do… This market needs stabilization.”  

That’s open to interpretation – the market has been perfectly stable, compared with 2022’s volatile state. But he more means his stability, not the market’s, one supposes.  

As you can see above, the OPEC post-April rally is barely a blip. 

The early verdict – which doesn’t mean much – is that OPEC+’s output cuts have had something of a desired effect, with prices up around $1 a barrel on Monday. Some of the muted reaction may be because some people were burned by jumping into the rally that ended up not lasting, and the reality that some of the production cuts for 2024 already reflect current output from several nations.  

The market, following the dip over the last several weeks despite OPEC’s move, is in a bit of a show-me mood, and the outcome for prices will depend on what happens with overall stock balances around the world, analysts at JPMorgan note. “The size of the reduction is credible and should at minimum limit the downside pressure on prices for the rest of the year. For prices to climb higher, crude stocks must draw, an outcome that on paper should be easily achieved already in June and most definitely in July, assuming no recession,” writes Natasha Kaneva, commodity strategist at JPM.  

Not for the faint of heart! Those are workers from grid operator China Southern Power Grid inspecting power cables connecting transmission towers in Guangdong province, one of the spots seeing heavy power demand. (File photo)

Power grids in Asian nations are struggling to keep up with demand in the face of relentless heat. In China, heat waves have hit across the southern and eastern part of the nation, boosting overall power demand. Overall demand for electricity has surged, as China Southern Power Grid, one of the country’s two grid operators, is expecting peak power load to surpass 200 million kilowatts, near historical highs, and weeks earlier than normal, as Ryan Woo and David Kirton report here. 

In Vietnam, big manufacturing hubs are seeing blackouts as well. Vietnam is also dealing with the heavy heat and more than 11,000 companies have agreed to cut consumption, as Khanh Vu and Francesco Guarascio report.  

In Bangladesh, power cuts could worsen in coming weeks due to a fuel shortage that has caused power generating units to shut – including its biggest coal-fired power plant, as Ruma Paul and Sudarshan Varadhan report here. Nasrul Hamid, minister of state for power, energy, and mineral resources, said right now that there is “no alternative other than to cope with the shortage. We will have to bear with this for another two weeks.” 

More inspections are coming for oil tankers at specific ports. 

Ports in China’s Shandong province are pushing for more information about some of the older oil tankers – think 15 years and up – that could delay unloading of crude shipments for the country, as Muyu Xu reports here. Shipping agencies in the region are being notified that they need to give more details on the age of the tankers, whether they changed their name and other inspection records.  

The information requests are new – and it may end up disrupting trade into the Qingdao and Lanshan ports, which are two of the top five biggest Chinese oil importing locales. The Shandong Maritime Safety Administration told Reuters that it wasn’t doing anything new in terms of inspections. The reasons for the enhanced security measures are also not clear. If the delays worsen, it will make it harder for smaller refiners to process oil as they ramp up with COVID restrictions removed.  

“Taman is suspending LPG transhipment as it is dangerous after all those (drone) attacks – the gases are most explosive.”  

A Reuters source, speaking on condition of anonymity, on how Russia’s Black Sea port of Taman will suspend exports of liquefied petroleum gas because of recent drone attacks from Ukraine 

The CEOs of America’s biggest oil companies made a good chunk of change – more than expected – due to big compensation packages that have surged in value, as Tim McLaughlin reports here. Overall, a Reuters analysis of stock-based pay given to CEOs at 20 U.S. oil and gas companies in 2020 showed the value of that stock more than doubled by 2023 once shares vested.  

So how much was that worth? CEO pay for companies in the S&P 500 Energy Sector Index was worth roughly $500 million, up sharply from earlier estimates of $187 million. How are they managing this? Well, they tie their performance to total shareholder return – which is then of course compared against other energy companies, all of whom are getting hit at the same time.  

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