Oil Rig At Night

World oil prices reached their highest in three months last week as inflation continued to slow in key nations and OPEC+ decided Friday to maintain its current production cut of one million barrels a day, begun in the spring, through September.

As a result, the Saudi kingdom will produce about nine million barrels a day next month, roughly nine percent of global demand. It has cut its output by two million daily barrels since last year’s third quarter.

The Saudis are working to drive prices higher to fund Vision 2030, an ambitious plan to wean the country’s economy from its dependence on oil and create jobs for a restless younger generation. The plan includes building a $500-billion futuristic city to be called Neom.

Russia also will cut its oil exports by 300,000 barrels per day beginning in September, the country announced, adding to the 500,000 barrels a day it had cut from its exports beginning in March through the end of this year.

Russia sells most of its exported oil to China and India at prices steeply discounted from global benchmarks.

Saudi Arabia’s exports to Europe have increased since the conflict in Ukraine abolished oil trade between Russia and the continent. 

U.S. oil production is at record levels but oil prices are set in world markets, so the Biden administration has been urging Saudi Arabia and other OPEC+ members to moderate crude prices to lower the cost of vehicle fuels.

Futures prices for benchmark Brent crude shot up 13 percent in July, the largest monthly jump in 18 months, The Wall Street Journal reported. West Texas Intermediate crude, which sets U.S. oil prices, gained more than 15 percent.

The cuts are likely to boost global gasoline prices further. In the U.S., gas prices reached $3.82 per gallon on 3 August, compared to $3.54 a month earlier. Both are far below the $4.16 national average a year earlier.

The average national gas price was $3.83 a gallon on 7 August.

After languishing in the low $70s in recent months, oil prices are likely to reach $100 next year, analysts at Société Générale predict. 

Standard Charter’s analysts have pegged 2024’s price at $98, adding that the world will use 2.8 million more barrels a day than it produces this month and the daily deficit will remain above two million for the rest of this year.

OPEC+, the global oil cartel led by Saudi Arabia, has made production cuts to buoy prices over the past year as the world economy slowed. Major oil companies also used their cash to boost dividends and buy back their stock instead of investing more in future production, as we reported in “Oil Majors Withhold Investment in New Production” (3 Aug 2021) and “Oil Majors Use Cash to Buy Back Stock, Increase Dividends”.

“The market is really starting to respond to the production cuts by Saudi Arabia,” Saad Rahim, chief economist at commodity trading firm Trafigura, told The Wall Street Journal.

Meanwhile, the likelihood of a serious U.S. recession is fading, raising expectations for a boost in economic activity and, with it, oil demand.

Goldman Sachs analysts have predicted oil demand in July will have set a record, with spurts in the U.S. and India outpacing China’s weakness.

The rising cost of oil could spread through the world’s economies, challenging central banks’ efforts to rein inflation back to the 2-percent level that many countries have targeted. Gasoline, electricity, and other forms of energy make up 7 percent of the U.S. consumer price index.

Higher oil prices “will likely slow the disinflationary trends we’ve seen,” Richard Bronze, head of geopolitical strategy at the Energy Aspects consultancy, said to the WSJ. “This will be a challenge for central banks.”

China remains an unknown in the global oil equation, the WSJ noted: although its economy is stagnating, it imported 45 percent more oil in June than a year earlier, customs data revealed. However, it could be stockpiling in anticipation of higher prices and lower global supplies ahead.

TREND FORECAST: Major oil companies know the world is shifting to electric mobility and also toward plastics not made from petroleum. They already have proven reserves to last years into the future and are reluctant to sink money into what could be “stranded assets”—investments in finding and proving new oil fields that will never return a profit.

The calculus is different for Saudi Arabia, Russia, and countries in the South that depend heavily on oil revenue.

Those nations will continue to carefully calibrate price and output together to maximize their returns for as long as possible. That involved keeping enough oil flowing to avoid oil shocks that speed the shift to renewable fuels, but withholding enough to squeeze the last dollar, pound, euro, and yuan from consuming nations.

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