The EIA revised its 2019 global oil demand outlook downward this week. While the revision is slight—101.45 million bpd compared to 101.54 million bpd—it reflects growing concerns that a global economic slowdown will impact oil consumption and weigh on oil prices.
In fact, the EIA forecasts that global oil stocks will grow at a rate of 400,000 barrels per day in 2019. This week OPEC also issued downward revisions to its forecasts, expecting that the demand for crude oil in 2019 would only exceed 2018’s demand by 1.24 million bpd. This is a reduction of 50,000 bpd from its previous forecast.
Oil prices rose despite this gloomy economic news, likely because the Saudi oil minister, Khalid al-Falih, announced that Saudi Arabia plans to cut its oil production to close to 9.8 million bpd in March with a drop in oil exports to 6.9 million bpd. He gave no reason for the intended cut, which is far below Saudi Arabia’s 10.3 million bpd production allocation under the current OPEC quotas.
1 Week Oil Price Chart
This begs the question of whether Saudi Arabia is trying to play the role of swing producer and cut its own production back to keep oil prices from falling too much. This was a strategy Saudi Arabia pursued for a time in the 1980s, under the direction of then oil minister Zaki Yamani. Instead of engaging all OPEC members to cut production at the same time, the Kingdom tried to keep prices elevated by unilaterally reducing its oil production.
However, the move failed to benefit Saudi Arabia at the time, and the result was that the country lost a great deal of money. That failed experiment was the primary motivating factor behind Ali al Naimi’s refusal to cut production in 2014 when he could not gain the cooperation of other countries, including non-OPEC countries. In 2014, Naimi, who served as the country’s oil minister from 1995 to 2016, refused to have Saudi Arabia bear the burden of production cuts alone.
The situation now is not exactly the same as it was in the 1980s or in 2014. However, since Saudi Arabia has unilaterally reduced its production several months in a row, oil watchers must wonder whether the country is trying to be the swing producer and prop up prices on its own. Oil watchers must also wonder about the efficacy of this plan for Saudi Arabia’s oil industry, economy, and state coffers.
If Saudi Arabia is trying to act as the swing producer, a major problem with the plan is that the United States seems able to fill any gaps in the market that would come from Saudi cuts. Saudi Arabia knows about the U.S. capabilities, so unless there is a technical reason for the Middle Eastern country’s planned production cuts, it is not likely that the Kingdom will make deeper cuts in April. Saudi Arabia is also unlikely to increase cuts since Russia has yet to fulfill its promised cuts from the last OPEC+ meeting in December.
The U.S. is likely to see oil stocks rising in the coming weeks as refinery maintenance season is now underway. For several months, refineries in the United States had been running at full capacity. Now, refineries are slowing down or going offline to conduct yearly maintenance and prepare to produce summer blends of gasoline. U.S. exports of crude oil and refined products have also been falling, meaning more oil and products are going into storage.