Oil prices ‘melt up’ in a march towards $US100 a barrel

The Saudis “are starving the market of oil,” said Gary Ross, chief executive of Black Gold Investors, a trading firm.

Ross said that the coming weeks and months may answer why the Saudis are keeping their output at about 9 million barrels a day, nearly 2 million barrels a day less than a year ago.

“We will find out what price they want when they decide to increase supply,” he said.

Speaking last week at a conference, Prince Abdulaziz bin Salman, the Saudi oil minister, seemed to signal that Saudi Arabia was not ready to pump more, even with prices of Brent crude reaching well over $US90 a barrel.

‘Jacking up prices’

While denying that Saudi Arabia was “jacking up prices,” he said that the kingdom wanted to wait until there was “data and clarity” before putting more oil on the market. The Saudis say they worry about the risk that new supplies may sink prices when recession fears are still in the air.

It is a tactic that could, by stimulating more oil output from other countries or dampening demand, lead to the fall in oil prices that the Saudis say they are trying to avoid.

“Higher prices in the near term could make for more downside for prices next year,” analysts at Citigroup wrote recently.

But global demand for oil has grown strongly of late, outstripping supply.

Despite China’s slumping economy, demand in the world’s largest importer is expected to increase by a healthy 1.6 million barrels a day this year, about three-quarters of overall global growth, according to the International Energy Agency.

Mr McNally of Rapidan estimates that in the fourth quarter of this year, global demand for oil will exceed output by 1.8 million barrels a day, or nearly 2 per cent of the market.

Already, this deficit in supply is leading to a rapid drawdown of oil held at key storage areas like Cushing, Oklahoma. Even if OPEC+ begins unwinding the cuts next year, as some analysts expect, oil stocks will be “uncomfortably low,” increasing the risk of price volatility, the IEA recently warned.

The strength of demand is also seen in the hefty profits being made by refiners, especially on diesel. The heavy grades of crude that the Saudis are withholding are especially useful for making diesel, which is used in trucking, agriculture and industry.

Refiners seeking crude for diesel are willing to pay premiums because they are making “three times the usual” profits, said Viktor Katona, an analyst at Kpler, a research firm.

Saudis seized control

In a move that will further tighten the market, Russia recently banned most exports of diesel and other fuel, in order to help ease domestic prices.

It is the Saudis, though, who have seized control of the market over the past year by orchestrating a series of cuts, including a unilateral trim of 1 million barrels a day starting in July that the prince called a “lollipop”.

The Saudis spurred prices further this month when they said that the latest production cut would extend until the end of the year. Russia also promised a reduction in exports of 300,000 barrels a day.

Russia is benefiting from the Saudi-led actions. The IEA estimates that Russia had $US17.1 billion ($27 billion) in oil export revenues in August, the highest monthly total in nearly a year.

The Saudis, though, are probably not entirely happy with the situation. They are producing well below their capacity and giving up a share of the market. Paradoxically, the national oil company, Saudi Aramco, is spending billions of dollars to increase the amount of oil it can pump.

Mr McNally, who served as an energy adviser to President George W. Bush, said he thought that the Saudis were nearing a point where they would seriously consider increasing supplies. “I think the Saudis aren’t going to deliberately let things get out of hand,” he said.