The only thing more surprising than the comment from Ali Naimi, the Saudi oil minister, that the oil market is oversupplied, is how seriously the market appears to have taken it. The oil price has dipped sharply today, according to some at least, because of Naimi’s comments.
The evidence Naimi cites is that the Saudis cut output last month by some 800,000 barrels per day. Some of this may have come from reduced Japanese output, after the earthquake put many of its refineries out of action. But this demand is likely to return relatively soon – it certainly shouldn’t be viewed as gone from the market in the long term.
Another, possibly more important reason for the Saudis to cut output is to manage their medium-term spare capacity. Although the market is comfortable with the 3.5m barrels the Saudis say they have, traders are particularly concerned about whether that number is rising or falling. To support prices, the Saudis have to show that capacity is not being eroded.
Naimi has form with such “oversupply” comments. He said the same thing in November, and since then Brent has shot from $86 to $121. Meanwhile, capacity has been lost from Libya (the bulk of the country’s 1.6m b/d) , the Gulf of Mexico is still largely closed for business and China’s demand continues to soar. Yet we are still expected to believe the market is oversupplied.
Of course, such oversupply comments help take the heat from Saudi Arabia for not boosting output. But it might be more difficult to maintain this position if prices don’t fall considerably more than a few dollars.