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Saudi Arabia cuts oil production in July despite OPEC agreement to hike output

Key Points
  • OPEC's oil output ticked up by 41,000 barrels per day to 32.3 million bpd in July.
  • Top exporter Saudi Arabia's production fell just one month after it reached an agreement with OPEC and other producers to hike output.
  • The monthly production figure the Saudis reported was about 150,000 bpd lower than an estimate by independent sources.
OPEC's July monthly report

OPEC's oil production ticked higher in July, but cuts by top exporter Saudi Arabia weighed on the 15-member group's output just one month after it agreed to start pumping more crude.

The Saudis throttled back drilling last month after agreeing with OPEC, Russia and several other producers to put more barrels on the market in June. The kingdom is facing pressure from big oil consuming nations like China and India, as well as the Trump administration, to tamp down fuel costs ahead of the renewal of U.S. sanctions on Iran, OPEC's third biggest producer.

President Donald Trump is aiming to cut Iran's oil exports to zero by November, a policy that threatens to leave the world short of oil and boost prices at the pump if OPEC and Russia cannot fill the gap. A group of two dozen oil-producing nations has been limiting its production since January 2017 in order to drain oversupply, but has scaled back that policy in light of the Iranian sanctions and output declines in places like Venezuela and Angola.

"Compared to a year earlier, there has been an overall improvement in crude oil prices in 2018," OPEC said in its monthly report. "At the same time, product prices have generally followed the upward trajectory of crude oil prices."

Iran is still the big supply risk in the oil market, says analyst

In another twist for the market, OPEC's latest report shows a significant discrepancy between July production figures provided by Saudi Arabia and data compiled by independent sources. While the kingdom says it cut output by about 200,000 barrels per day, an average of estimates from several outside sources puts the drop at nearly 53,000 bpd.

Saudi Arabia had telegraphed the drop prior to the release of the report. However, S&P Global Platts and the U.S. Energy Information Administration estimated the Saudis actually hiked output to 10.6 million bpd in July, The Wall Street Journal reported last week. According to the Journal, the Saudis asked several sources whose estimates underpin the independent figure to make an adjustment for July, but Platts stuck by its analysis.

The Saudis face the challenge of managing the oil market so that prices do not rise high enough to hurt demand or upset allies like Trump, but do not fall so low that they put stress on the kingdom's finances.

Saudi Arabia is trying to keep oil prices around $80 a barrel, analysts say, and a drop in Saudi production tends to boost prices. U.S. crude ended last week below $68, while international benchmark Brent crude settled under $73.

The drop in production from Saudi Arabia comes after the kingdom hiked output by more than 400,000 bpd in June.

The entire OPEC group saw its output jump by nearly 41,000 bpd in July to 32.3 million bpd, according to independent figures cited by the group in its monthly report.

Kuwait and the United Arab Emirates, two of the only OPEC nations with spare capacity, contributed the biggest and third-largest increases, respectively. Africa's top producer, Nigeria, rounded out the top three largest increases for the month, while Iraq also pumped more.

In addition to Saudi Arabia, independent sources also reported declines of about 50,000 bpd from Iran, Libya and Venezuela.

Saudis want $70 to $80 oil, says pro

Looking forward, OPEC increased its forecast for oil production from countries outside the group for this year and next.

It now expects those countries to pump 59.6 million bpd in 2018, up 73,000 bpd from its last estimate. In 2019, it sees non-OPEC producers pumping nearly 61.8 million bpd, or 106,000 bpd more than previously expected. Both adjustments were due to OPEC's view that China will pump more than previously anticipated in both years.

Meanwhile, the cartel knocked down its outlook for growth in global oil demand by a moderate 20,000 bpd for both 2018 and 2019. However, the world is still expected to consume a record 98.8 million bpd this year, while demand is projected to top 100 million bpd for the first time next year.

That will leave the world with less demand for OPEC's oil. This year, oil buyers will need about 600,000 fewer bpd from OPEC than it consumed in 2017. Demand for OPEC's oil is set to drop by another 800,000 bpd in 2019, according to the group.