Is Saudi Arabia Reverting to Swing Oil Supplier?

(The views and opinions expressed in this article are those of the attributed sources and do not necessarily reflect the position of Rigzone or the author.)

Until the onset of the shale revolution, OPEC – primarily Saudi Arabia – was long considered the world’s “swing” supplier of crude oil. As a 2015 Rigzone article explains, taking on that role involved adjusting crude supplies to offset perceived oil market shortages and gluts. Thanks to the influx of non-OPEC crude supplies, much of it resulting from the U.S. shale revolution, the OPEC/Saudi swing producer status diminished.

Much has changed in the oil market since that 2015 article appeared, and one of Rigzone’s regular market-watchers addresses the question of whether Saudi Arabia is reclaiming its former title. Read on for his take on the matter, along with insights about other recent trends, in this installment of oil and gas market hits and misses.

Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?

Tom Seng, Director – School of Energy Economics, Policy and Commerce, University of Tulsa’s Collins College of Business: Overdue action by the world’s most influential oil producer has sent both WTI and Brent prices back up to pre-March levels this week. Adding further bullish sentiment was an inventory report that was considerably more bullish than expected. After the OPEC+ group decided to lower the expected increase in oil production for March, Saudi Arabia surprised the market on Tuesday by announcing it would cut its output by 1 million barrels per day (bpd) in February and March to help support global oil prices. All other member nations would hold at current levels while Russia and Kazakhstan will make small increases.

Some have wondered if Saudi Arabia has chosen to return to its previous role as the world’s swing supplier of crude oil, increasing when prices are deemed too high and cutting when they are seen as unsustainable. However, the Kingdom remains aware that, if prices increase too rapidly, U.S. shale oil producers will fill the gap as they have done previously when curtailments occurred. Additionally, any substantial increase in demand is still months away as the COVID-19 virus continues to ravage countries while the vaccine rollout creeps along. WTI has been on an upward trajectory since Tuesday’s announcement, breaking the $51 level today and moving nearer to $52. Brent, meanwhile, has surpassed the mid-mark between $55 and $56.

This week’s Energy Information Administration (EIA) Weekly Petroleum Status Report showed a very large 8 million-barrel decrease vs. forecasts calling for a decline of only 1.8 million barrels. At 486 million barrels, inventories have fallen to nine percent above the five-year average for this time of year. Refinery utilization increased from 79.9 to 80.7 percent, or 14.4 million barrels per day (bpd). Total motor gasoline inventories increased by 4.5 million barrels and are at the five-year average for this time of year. Distillate inventories increased by 4.5 million barrels last week to four percent above the five-year average.

With the holiday travel season officially over, demand for both gasoline and distillates (jet fuel) may decline considerably over the coming months until the summer. Even then, unless there is widespread distribution of the coronavirus vaccine, vacation travel could be stymied. Crude oil stocks at the key Cushing, Okla., hub increased by 800,000 barrels to 59 million barrels, or, 77 percent of capacity there. U.S. oil production last week held at 11 million bpd, down from 12.9 million bpd a year ago. U.S. exports of crude slipped in October from 2.9 to 2.7 million bpd as China – the Number One destination for U.S. oil – cuts its imports. Also, for the first time in 35 years, the U.S. imported zero oil from Saudi-Arabia.

The current turmoil in Washington, D.C., is being ignored by Wall Street for the most part as the Dow continues to remain above 30,000, even breaching 31,000 this week. The S&P and NASDAQ are holding onto gains this week while the U.S. dollar continues in the doldrums, sinking below the “85” mark again – further helping to support oil prices.

Meanwhile, natural gas prices look to settle higher on the week on a large decrease in inventory. The EIA’s Weekly Natural Gas Storage Report indicated a withdrawal of 130 billion cubic feet (Bcf) last week, leaving stored natural gas at 3.3 trillion cubic feet – four percent higher than last year and six percent over the five-year average. Supply last week was 99.1 Bcf per day (Bcfd) vs. 91.4 the prior week and about 95.5 Bcfd a year ago. Total demand last week was down 2 Bcfd to 113 Bcfd, with residential consumption down. Power and industrial demand was steady while exports to Mexico increased to 5.1 Bcfd and exports of LNG held at 11 Bcfd. Kinder Morgan’s Permian Highway pipeline entered service on Jan. 1, adding 2.1 Bcfd of takeaway capacity out of the Permian Basin to Katy, Texas, near Houston, with connections to the U.S. Gulf Coast and Mexico markets. This increased access to markets for the Permian Basin gas, resulting in a positive basis relative to Henry Hub.

Rigzone: What were some market surprises?

Jamie Webster, Senior Director, Boston Consulting Group Center for Energy Impact: There were bigger surprises outside the market this past week, but the latest concluded OPEC+ meeting left plenty for the markets to internalize, with an agreement by the group to increase production and then separately Saudi Arabia signaling its intention to reduce production 1 million bpd later in the first quarter. These decisions on supply have already had implications in the physical market in the North Sea.

Seng: The output curtailment decision by Saudi Arabia was definitely a surprise but a pleasing one for U.S. oil producers.

To contact the author, email mveazey@rigzone.com.