Oil Market Approaches $90/bbl Amid Saudi Cuts
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The Commodities Feed: Oil cuts and LNG supply risks
The oil market continues to move closer to US$$90/bbl. A possible rolling over of Saudi cuts could see it finally break this level. Gas markets will get some more clarity this week on Australian LNG with workers at 2 facilities set to go on strike as soon as this Thursday if unions and Chevron fail to come to a deal.
Energy - Saudi oil cuts
The oil market had a strong week last week with ICE Brent managing to settle 4.82% higher, which also saw the market almost hit US$89/bbl and trading to its highest level since January. Support would have come from growing expectations that the Fed could be done with its hiking cycle. In addition, fundamentals remain constructive with the oil market set to continue to tighten for the remainder of the year. This tightening is largely due to OPEC+ supply cuts.
However, whilst OPEC continues to cut, there are some producers within the group who continue to see output edge higher (Iran, Libya and Venezuela - these members are exempt from current supply cuts). Preliminary OPEC production data for August is starting to come through and the Bloomberg survey shows that the group increased output by 40Mbbls/d MoM to 27.82MMbbls/d. While Saudi output is estimated to have fallen by 130Mbbls/d to 8.98MMbbls/d, this was offset by increases from Iran and Nigeria. Iranian output is estimated to have increased by 90Mbbls/d to 3.07MMbbls/d. Nigerian output increased by 80Mbbls/d to 1.34MMbbls/d.
This week the oil market will be focused on what Saudi Arabia decides to do with its additional voluntary cut of 1MMbbls/d. The Saudis will need to decide whether to roll this cut into October, let it expire at the end of September or gradually ease the cut from next month. We believe that the Saudis will likely roll over the cut into October, as they will not want to put any renewed downward pressure on the oil market, although fundamentally, the market should be able to absorb the return of these barrels, given the large deficit forecast for the rest of the year.
The latest positioning data shows that speculators reduced their net long in ICE Brent by 15,544 lots over the last reporting week, leaving them with a net long of 202,227 lots as of last Tuesday. However, given the move in the market since then, along with the increase in open interest, the actual speculative net long has likely increased.
Natural gas prices also remain fairly well supported with a combination of continued supply risks around Australian LNG as well as reduced Norwegian gas flows due to ongoing maintenance at fields. Strike action at the Gorgon and Wheatstone LNG facilities in Australia could start as soon as this Thursday if unions and Chevron do not come to an agreement.
