Commodities Week Ahead: Oil Bulls Wish for More OPEC Magic as Greyer Q4 Dawns

• Oil starts Q4 on a mildly positive note, rising in Asia's morning session by roughly 1%
• Still, continuation of oil's bull run may be in jeopardy as Saudi Arabia and Russia face domestic demand concerns
• Expectations surround the October 4 OPEC+ meeting, where potential production adjustments could sway oil prices

After a near 30% run-up in just three months, oil bulls are counting on OPEC to sprinkle a little more magic dust on the market. 

But the enablers of oil’s third-quarter rally — namely Saudi Arabia and Russia — are anticipating an array of different challenges for the October-December stretch that could make a repeat performance difficult.

Hiroyuki Kikukawa, president of Tokyo-based NS Trading, said in comments carried by Reuters: 

"Whether or not the market will rise further will depend on future demand trends.”

Asia's crude oil imports slipped for a second consecutive month in September as refinery maintenance trimmed demand and the impact of higher prices started to weigh, Reuters reported, citing LSEG data. 

The world's top importing region saw arrivals of 24.95 million barrels per day in September, down from August's 25.22 million, according to LSEG.

Crude prices began the fourth quarter in the positive, trading modestly higher by Monday afternoon in Asia, after a 1% drop in last month’s final session that took just a little shine off their blockbuster gains in July to September.

Supporting the market were comments made privately to the media by sources within the Organization of the Petroleum Exporting Countries that the 13-member Saudi-led OPEC and its 10 independent oil producing allies steered by Russia were unlikely to tweak production targets for November and December. The OPEC+ alliance meets Wednesday to review output policy for the rest of the year. 

The Saudis and Russians pledged last month to cut at least 1.3 million barrels per day of their regular production until the end of the year, in what many believe was a bid to bring crude back to $100 a barrel or more. U.S. crude went from lows of beneath $64 a barrel in May to above $95 in September, while global benchmark Brent rallied from below $72 to above $97 in the same span.

Pressure Building on Saudis, Russians From Tight Market They’ve Created

Notwithstanding the comments from the OPEC sources, pressure appears to be building on the Saudis and Russians to ease back on some of their production cuts in the fourth quarter in order to have adequate oil for cargoes scheduled for year-end delivery. 

There is also the notion, especially among the Saudis, that they need to protect market share for their oil with the current high prices for a barrel that expose them to risk of under-cutting by their allies, including the Russians. 

Already, India’s imports of Saudi oil were at below 500,000 barrels per day in September — the lowest in almost a decade.

On China, ING’s energy analysts observed in a note that while Chinese manufacturing PMI returned to expansion territory in September for the first time since March,  "the Saudis have said that there is still concern over Chinese demand”.

Official data on Saturday showed that China's factory activity expanded for the first time in six months in September, adding to a run of indicators suggesting the world's second-largest economy has begun to stabilize.

However, a private-sector survey on Sunday was less encouraging, showing the country's factory activity expanded at a slower pace in September.

Indeed, a durable recovery in China's economy is being delayed by a property slump, falling exports and high youth unemployment, raising fears of weaker fuel demand.

Saudis Might Need to Produce More, Not Less

Thus, the Saudis might need to produce more in October — not the same of what they pumped in September and certainly not less — to keep China, India and other important customers happy. 

In fact, crude shipments from Saudi ports likely rose between 300,000 and 400,000 barrels per day last month from August — despite their so-called “lollypop cut” of one million barrels per day — OilPrice.com noted in a roundup of market intelligence gathered from various sources.

And the trend could continue, it said.

The Saudis have also been quite restrained in adding to the Official Selling Price, or OSP, of their crude despite Brent’s runaway rally, that market roundup showed. Saudi Arabia’s medium sour crude grades were hiked by $0.10 per barrel each, moving Arab Light to a $3.60 per barrel premium vs Oman/Dubai. The only Saudi crude grade that saw a notable increase in October was Arab Super Light, a very rare condensate-like grade that sees 1-2 cargoes per month, which rose by $0.50 per barrel. 

“In an environment like this, Saudi Arabia’s national oil company Saudi Aramco was expected to hike Asian prices by a solid margin,” the OilPrice roundup said.

“Surprisingly, the anticipated OSP increase did not happen. Overall, the lack of pricing ambition reflected wider worries about the health of Chinese demand into the remaining months of 2023, as well as significantly lower Indian nominations lately.” 

To Moscow’s benefit, India has begun buying Russian urals crude at around $80 per barrel — markedly higher than the $60 price cap set by the G7, but still lower than the flat price of Brent.

But Russia, which has committed to the Saudi production squeeze plan by announcing a 300,000-barrel per day cut of its own, is also under pressure to keep up with deliveries promised to customers.

Russia Seen Rolling Back on Fuel Export Ban  

Moscow recently eased its separate ban on fuel exports introduced to stabilize the domestic market. Analysts do not expect those restrictions to stay for long because they may hit refinery runs and impact relations with customers.

Turkey, Brazil, Morocco, Tunisia and Saudi Arabia were among the main destinations for Russian diesel this year, JPMorgan said in a note.

“(A) protracted export ban would negatively impact the relationship with the new customers that Russian oil companies have so painstakingly built over the last year and a half,” according to JPMorgan.

Even so, Russia has not discussed a possible crude oil supply increase to compensate for Moscow’s fuel exports ban with OPEC+, the Kremlin has said.

That communication might be made directly when the Russians and Saudis hold talks at the Oct. 4 meeting of the Organization of the Petroleum Exporting Countries. 

After having psyched the trade into believing their production cuts could go on indefinitely and against market reality, it would be important for neither side not to publicly admit anything to the contrary and work instead in keeping up the narrative they have created.

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Disclaimer: The aim of this article is purely to inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.