I find myself somewhat taken aback by the unwavering commitment of the Saudi Arabian authorities to elevate oil prices. This determination even surpasses the resolute stance taken back in 2017, often referred to as the “whatever it takes” moment, when the former Saudi energy minister, Khalid Al-Falih, set his sights on reducing US inventories. It also eclipses the intense price war of 2020, when the Saudis engaged in a heated battle with the Russians over a production cut agreement.

A close examination of Saudi crude exports for the initial 24 days of August reveals an average output at its lowest point since June 2020, hovering around 5.3 million barrels per day (b/d). This reflects a remarkable reduction of nearly 1 million b/d compared to July figures. Although forthcoming data suggests a potential rebound, the final tally may likely settle in the range of 5.6 to 5.8 million b/d.

What distinguishes this current situation and forms the core focus of this article is the unparalleled level of commitment demonstrated by the Saudis.

Some of you may likely have anticipated the Saudis extending their voluntary production cut through the end of this year. We have elucidated that this decision is partly influenced by logistical timing concerns, specifically when exports impact physical inventories and their subsequent influence on market sentiment. However, in light of the latest Saudi crude export figures, I find it prudent to consider an extension into the first quarter of 2024.

Here’s the key insight:

The International Energy Agency’s (IEA) projection for the global oil supply and demand balance through the end of 2024 suggests a balanced outlook, particularly as outlined in their August Oil Market Report (OMR).

It’s crucial to note that both the first and second quarters of 2024 are expected to witness stockbuilds. Importantly, the IEA’s projection does not incorporate the voluntary 1 million b/d cut implemented by the Saudis into their 2024 balance. Instead, they assume that the Saudis will persist with their original voluntary cut of approximately 500,000 b/d.

From my vantage point, the Saudis have executed this strategy with finesse. By maintaining a month-to-month approach to the production cut, they discourage speculators from driving up long-term prices, thereby ensuring market stability. This measured approach also precludes speculators from prematurely influencing prices, mitigating the risk of demand disruption in an uncertain global economy. Essentially, the voluntary cut has achieved precisely what it was designed for – a reduction in global inventories.

Consider this scenario: as we approach the end of October, oil prices remain within the range of $80 to $90. Despite a significant decrease in global oil inventories, market sentiment remains cautious, with speculators anticipating a potential recession that could impact oil demand. At this juncture, the Saudis are faced with a critical decision on whether to extend the cut until the end of December. However, as they scrutinize the global oil supply and demand balances, the first quarter shows a buildup in inventories. All the prior efforts with the voluntary cut could be nullified if storage levels begin to rise once more.

Given the existing framework of the voluntary cut, it would be prudent to gradually phase out the 1 million b/d reduction after the first quarter to prevent inventory accumulation. Furthermore, with Russia now cooperating and possibly extending their voluntary cut into year-end, it would be operationally challenging for them to increase production during the harsh winter months. These factors strongly suggest to me that there is a better than 50% chance the Saudis will extend some form of this voluntary cut into the end of the first quarter and possibly the second quarter of 2024.

It is important to emphasize that this perspective does not align with the consensus view. Many oil analysts anticipate the Saudis rolling back the voluntary cut once the storage draw becomes substantial. However, we hold a different perspective. We believe that the Saudis’ ultimate goal is price stability, and if that necessitates maintaining a lower overall storage level, they will persist with the voluntary cut until they deem it necessary.

In essence, for Brent crude to experience any significant reduction, it would likely have to consistently average over $90 for several months, a scenario that appears improbable given the consensus expectations of a stockbuild in the first quarter.

The current situation is indeed remarkable…

As I have observed the actions of the Saudis over the years, this level of determination is unparalleled. If our analysis holds true, and the Saudis do indeed extend their cut, the market could experience a significant paradigm shift. Global onshore crude inventories are already on a rapid downward trajectory, and all indicators suggest that this trend is set to continue. Perhaps, the situation is as straightforward as presented in this article, or there may be underlying complexities yet to be unveiled. Time will ultimately reveal the full narrative.