Something odd is happening in the oil markets. Efforts by major oil producers to prop up oil prices above the current levels seem faltering — at least for the time being.

Both Riyadh and Moscow, the oil heavyweights, need higher oil prices. Saudi Arabia needs Brent crude to trade at around $81 a barrel to balance its budget, the International Monetary Fund estimates. Moscow, too, needs additional cash flow to sustain its Ukraine war efforts. But markets are in a bearish mode.

Moscow and Riyadh are now closely coordinating their moves to overcome the trend. Last Monday, almost simultaneously, both announced tightening their crude taps further.

Saudi Arabia announced prolonging the already announced unilateral production cut of one million barrels per day (bpd) for July, by another month, into August. Riyadh emphasised the cut could be extended even beyond August. That will keep Saudi output at nine million barrels per day. A couple of days later, Saudi petroleum minister Prince Abdulaziz bin Salman even vowed to do ‘whatever is necessary’ to stabilise the markets.

Oil is the largest contributor to Pakistan’s import bill, and any softening of the market helps Islamabad maintain a better balance of payment scenario

Minutes after the Saudi announcement, Russian Deputy Prime Minister Alexander Novak said his country would also cut crude output by an additional 500,000 bpd in August. Later Algeria too announced it would cut its output by an extra 20,000 bpd from August 1 to 31. This voluntary output cut will be on top of a 48,000 barrel reduction decided in April.

Some other producers are also reining in their output.

Organisation of the Petroleum Exporting Countries’s (Opec) Gulf producers Kuwait and the United Arab Emirates have largely complied with the voluntary cuts agreed early in June, a Reuters survey found. Saudi Arabia, too, lowered its output by 40,000 bpd in June. The July output cut of 1m bpd was over and above the June cut.

Opec’s biggest decline, of 50,000 bpd, however, came from Iran, where crude exports fell back from a usually strong level in May, the survey stated.

But markets continue to stay bearish. The Wall Street Journal reported last week that the Brent futures market had swung into a contango, meaning that spot prices for the benchmark crude had fallen below the futures price. This suggests that despite the producers’ output cuts, oil traders don’t expect a supply squeeze anytime soon.

Concerns about global demand continue to spook market sentiments. The latest US consumer spending report reveals that Americans are tightening their belts as inflation remains too high. This has reinforced expectations of more rate hikes by the Federal Reserve System, which would dampen oil demand, Reuters noted. Raising interest rates in other major global economies would also cause a dip in global crude consumption.

Goldman Sachs emphasised last week that rising interest rates would remain a “persistent drag” on oil. Chinese factory survey data, released last week, also shows ‘only’ modest growth in activity.

Reuters’ John Kemp pointed out in his latest column that sentiment among institutional oil traders had not been so bad since 2020, when governments’ pandemic response wrecked oil prices as lockdowns destroyed demand.

The moves by the producers have failed to yield the desired results — yet. Oil futures appear struggling to hold gains scored early last Monday after Riyadh and Moscow announced output cuts. Oil rose modestly after the announcements, but it wasn’t enough to prompt a “material rally,” wrote analysts at Sevens Report Research.

Earlier in June too, when Saudi Arabia voluntarily agreed to cut its production targets by an additional 1m bpd for July — oil prices jumped. But the effects were not long-lasting.

In the meantime, it is worth noting that the US Energy Department is on a purchasing spree. It bought 3.2m barrels of oil for its Strategic Petroleum Reserves (SPR) over the last weeks. Additional purchases for October and November deliveries to fill up the SPR are in the pipeline. Yet the needle has not moved much. For the time being, markets are far from tight. Prices continue to be under pressure. Prospects are not bullish.

This is an interesting situation. For the time being, oil producers are in for a bumpy ride. For consumers like Pakistan, this could result in a sigh of relief. After all, oil remains the largest contributor to Pakistan’s import bill, and any softening of the market would help Islamabad maintain a better balance of payment scenario.

Much, however, would depend on the overall health of the global economy.

Published in Dawn, The Business and Finance Weekly, July 10th, 2023