Saudi Arabia’s oil production is arguably the most important number in the industry, determining whether the market will be under- or oversupplied. It is closely tracked by a host of actors from oil traders to the White House, so when it throws up surprises it quickly attracts attention.
In June the kingdom vowed to raise output, in a move widely seen as responding to pressure from US President Donald Trump after crude prices reached the highest level since 2014.
But after hiking output that month, the kingdom has said that it lowered output again in July. Figures provided by Saudi Arabia to Opec and published on Monday suggest it cut output by 200,000 barrels a day last month to 10.3m b/d— reversing about 40 per cent of the previous increase.
It is fair to say the oil market — and potentially the tweet-happy occupant of the White House — might be wondering what is going on.
The kingdom has offered a prosaic explanation, saying it is simply responding to the level of demand in the market, producing the barrels its refinery customers need.
“Oil companies are not asking for more,” said one person familiar with Saudi energy policy.
But this has not been readily accepted by everyone in the market. Part of the reason the kingdom first responded to White House pressure to increase output is the reimposition of US sanctions on Saudi’s arch-rival Iran.
While oil sanctions do not take effect until November, the argument goes that Saudi Arabia should be lifting output regardless of customer demand to build up a supply buffer against the looming shortfall of Iranian barrels. Traders increasingly expect US sanctions to knock out at least 1m b/d of Iranian exports.
Consultancy Energy Aspects said it believed the reported 10.3m b/d figure was “too low and probably an attempt to support prices”, pointing to satellite imagery it said showed domestic inventories building in Saudi Arabia.
The kingdom may feel pressure from the White House to lower prices, but does not want the market to collapse given its own economic dependence on oil, trying instead to balance crude between $70 and $80 a barrel.
It also does not want to overly antagonise Iran, a fellow Opec member, which has opposed the cartel raising output aggressively.
The uncertainty has not been helped by agencies that track Saudi Arabia and other Opec members’ output putting out an unusually wide range of assessments for Riyadh’s production.
The six so-called secondary sources used by Opec — the International Energy Agency, the US Energy Information Administration, pricing agencies Platts and Argus, Petroleum Intelligence Weekly and IHS Markit — saw production between 10.3m and 10.6m b/d last month.
Argus and IHS Markit, which had relatively low assessments, both defended their numbers following a report that said some agencies had faced pressure from Riyadh to lower their production numbers.
Both said they had reached their assessments independently.
“I have never known the Saudis to take this kind of tack,” said Diane Munro, Argus Editor in Chief.
Sources at agencies with higher assessments — speaking on condition of anonymity — said they had, however, been contacted by Saudi officials who had cautioned their figures were too high.
Whatever the truth on Saudi output last month, attention will soon shift to August’s number. Traders will be bracing for the next surprise, unless more clarity arrives first.
