Source: Flickr user Spino73
In a bit of surprising oil news this week Saudi Arabia has reportedly reduced the amount of oil it supplied to the market in September. Saudi Arabia, which is the largest oil producer in OPEC, reportedly cut 328,000 barrels of oil per day from supplies. That reduced supplies from 9.69 million barrels of oil in August to 9.36 million barrels in September.
That being said, it appears the country only cut supplies to the market and not oil production as Saudi Arabia reportedly produced 9.7 million barrels of oil per day last month, which is actually up from 9.6 barrels per day in August, with the difference being put into storage. That sets it up for a looming showdown with its fellow OPEC members.
Saturated with oil
A combination of surging oil production in the U.S. and Russia along with tepid oil demand in China has pushed oil supplies well past demand. Currently, the oil markets are oversupplied by about a million barrels of oil per day according to comments Libya's OPEC governor Samir Kamal made to Bloomberg. This increase in supplies pushed oil prices into a bear market, sending prices down more than 20% over the past few months.
Brent Crude Oil Spot Price data by YCharts
In order to correct this imbalance OPEC needs to collectively reduce its supplies by about 500,000 barrels per day according to the Libyan OPEC governor. This is a sentiment that's echoed by fellow members Angola and Venezuela, which have all said OPEC needs to take action on prices.
The keys to the kingdom
That being said, Saudi Arabia really holds the keys as it pumps out a third of OPEC's oil. So, when it says that it can survive just fine with lower oil prices that sent shivers down the spine of the oil market because it had been believed that OPEC preferred oil around $100 per barrel. That is the oil price Venezuela, for example, needs to meet its budget while the UAE needs oil over $80 to meet its obligations.
However, the desire to maintain market share over profits is one that the industry never expected to see. Especially when $80 oil has the potential to slice $200 billion from OPEC's bottom line, and result in a $66 billion reduction of Saudi Arabia's cut, if prices stay that low over the next year. Because of this OPEC is in for a very interesting meeting next month when it is due for its next get together. Either Saudi Arabia will back off on its desire to maintain market share for the good of the group, or we could see an "every man for himself" mentality begin to emerge that would begin to diminish the role of OPEC in world markets.
Investor takeaway
Saudi Arabia might have surprised the oil markets this week by cutting oil supplies to the market. However, it has yet to cut production, which is what it and its fellow OPEC members will need to do in order to protect profits. Saudi Arabia has said it won't cut production, but it might have no choice if it wants to keep OPEC together as the calls are growing louder for the cartel to cut production in order to halt the slide in oil prices.
