Extra Saudi, UAE and Kuwait production cuts - Rystad Energy comments

Saudi Arabia, the UAE and Kuwait just announced new cuts on top of the OPEC+ deal requirements.

Here is a fresh comment from Rystad Energy’s Senior Oil Markets analyst Paola Rodriguez Masiu:

To start with, the major positive outcome of these additional cuts is that, according to out calculations, we will now probably avoid global storage tank tops if demand ramps up as expected and new lock-down measures are not imposed.

Before this cut, with the most recent global production shut-down data, we were approaching the maximum operating levels in July. Filling tanks above the maximum operating capacity require operators to use the contingency space, which is usually reserved for safety hazards or operational disruptions.

The additional unilateral cuts by Saudi, UAE and Kuwait is not totally surprising, and could be a reflection of two things:

1) An expectation of sub-compliance by fellow OPEC+ members (such as Iraq etc) and

2) a reflection of the continued supply-overhang due to risk of a lackluster demand recovery.

In our latest estimate before these news broke we were expecting global onshore stocks to build by an astonishing 9.0 and 3.0 million barrels per day during May-20 and Jun-20, respectively, really pushing the limits of the available storage capacity.

An extra 1.2 million bpd cut will not re-balance the market, but will surely remove strain from the storage infrastructure and buy time to wait for the demand rebound.

If you thought that this will immediately benefit crude producers though, think again. Crude producers will have to wait a bit longer to capitalize from the coming uptick in products demand. It should not be expected that crude intake will immediately rebound as much as demand because refiners are likely to first draw products out of inventory that have been accumulating over the last two months.

Read the latest issue of the OGV Energy magazine HERE.