Saudi Arabia and its OPEC⁺ partners’ production cuts are poised to moderately tighten the global petroleum market from late 2023 into early 2024. As of June, commercial crude oil and refined product inventories in OECD advanced economies stood at around 2,821 million barrels, according to the US Energy Information Administration (EIA).
These inventories were just -45 million barrels below the prior 10-year seasonal average, indicating a 2% decrease.
Further production reductions announced by Saudi Arabia will result in an additional 90 million barrels being removed from the market between July and September.
Russia has also declared extra cuts of 25 million barrels in August and September, contingent on full implementation.
Despite optimism about a “soft landing” for the US economy—characterized by lower inflation, reasonable unemployment, and recession avoidance—the manufacturing sectors in Europe and China remain sluggish.
China’s anticipated economic rebound following pandemic waves and movement restrictions has been repeatedly postponed, leading to concerns of a potential recession.
This, combined with OPEC⁺ output cuts, a steady US economy, Europe’s economic struggles, and China’s possible recession, has led to only a modest tightening of the expected market balance since June.
Front-month Brent futures averaged just under $86 per barrel in August (69th percentile since the year 2000, adjusted for inflation), up from an average of $75 per barrel in June (60th percentile).
The six-month Brent calendar spread has tightened to an average backwardation of $2.72 in August (78th percentile), compared to $1.33 in June (54th percentile).
While Saudi Arabia and OPEC⁺ partners continue their production cuts, global economic challenges outside the US have tempered the impact, delaying a cyclical recovery until 2024. Maintaining current production cuts is likely necessary until Europe and Asia’s economies show significant improvement.