A core part of the reason we are below consensus on our oil price forecast is our view that rising OPEC production is transforming the oil market from an under- to an over-supplied position, threatening a major inventory build.
Critical to that growth in supply has been the return of Libyan production, but also rising Saudi production, despite OPEC setting a 30mmb/d production target in December. OPEC crude production is now 31.4mmbd.
That increase is in line with our previously published view that Saudi production would remain high while oil prices are elevated.
Yesterday, we had what we regard as a clear statement of intent from Saudi Arabia in reported remarks made by its oil minister, Ali al-Naimi, in Doha, Qatar. Naimi repeated the claim that the Kingdom had 2.5mmb/d of spare capacity, that its overseas inventories were full, and that the oil market was in an oversupply position, contrary to fears of a shortage. Naimi went on to state that Saudi production would be 9.9mmb/d for March and April.
While sceptics will continue to doubt Saudi’s spare capacity claims, we agree with the thrust of Naimi’s remarks and if Saudi Arabia does maintain production at the promised level, we expect the markets to become much more concerned about the over-supply situation than pricing suggests they are now.
We regard this as a clear attempt to talk the price down, but it was backed by hard indications that Saudi is taking the actions it will need to if markets are to be convinced.