Saudi Arabia’s Unprecedented Production Cuts
To combat excess supply and boost oil prices, Saudi Arabia has taken significant steps to reduce oil production. As Niels Rasmussen, Chief Shipping Analyst at BIMCO, highlights, the country agreed to a voluntary reduction within OPEC of 500,000 barrels per day in May and announced a further independent reduction of 1,000,000 barrels per day in July.
Despite these efforts, Rasmussen notes that the cuts have not yet significantly impacted prices, as average Brent oil prices still fell $9/barrel from April to May. Increased production in Nigeria, Angola, and Iran led to a modest 2% month-to-month drop in total OPEC production in May, while global production declined by less than 1% within the same time frame.
Impact on Crude Tanker Market
The production cuts in Saudi Arabia have notably affected the crude tanker market, particularly the market for Very Large Crude Carriers (VLCCs). These giant vessels handle nearly 90% of Saudi Arabia’s seaborne crude oil exports and rely on the country’s exports for nearly one-third of all volumes carried by VLCCs.
As COVID-19 restrictions were lifted, China was initially expected to contribute more than half of the estimated increase in crude oil demand in 2023. However, recent concerns about China’s slower-than-hoped recovery have negatively impacted the crude oil markets.
China’s Contribution to Crude Oil Demand Growth
Despite worries, Rasmussen points out that crude oil exports to China have increased 18% year-to-date, with May volumes falling 21% month-to-month but still ending 6% higher than in May 2022. Furthermore, Saudi Arabian export volumes to China decreased by 18% month-to-month in May but were still 29% higher than the same period last year.
The EIA has also revised its estimations for global oil consumption. Comparing the agency’s forecasts from January and June, it now predicts consumption will average 101.0 million barrels per day (mbpd) in 2023, up from the previously estimated 100.5 mbpd. China’s consumption is still estimated to represent half of the global consumption growth.
The Path to Oil Market Recovery
Rasmussen suggests that the recovery of crude oil export volumes might be underway in June. However, if the market follows typical seasonality trends, a full recovery might only occur in July and the second half of the year.
In conclusion, Saudi Arabia’s bold production cuts and fluctuations in crude oil demand, driven by countries like China, play a significant role in the oil market’s future. The interplay of these factors will determine the pace at which the crude tanker market recovers and potentially regains stability in the long term.
