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The end of oil production cuts in Saudi Arabia may be closer than investors expect, Bob McNally, founder of Rapidan Energy Group, told Bloomberg TV on Thursday.
U. S. crude costs hit their peak of the year this week but fell Thursday to $92. 51 a barrel. Still, some in the industry have warned of even higher valuations going forward: as high as $150 a barrel.
But according to McNally, the persistence of high oil costs may simply lead to a drop in demand, which Saudi Arabia will have to avoid.
“There’s more chance that lately the market will believe that the Saudis will take their foot off the brake sooner,” he said. “They don’t need to over-adjust the market intentionally, because if there’s an increase, then demand will ease. “You will enter and have a collapse. They don’t need that. “
The world’s largest oil exporter has already shown some openness to easing its oil production cuts, McNally said. For example, during the latest announcement related to the extension of its cuts, Riyadh was under pressure that production would be reviewed every month and discussed for the first time an imaginable increase in production.
A resolution to lift the cuts could come in October or November, he said.
Together with its partners in the Organization of the Petroleum Exporting Countries, the kingdom has limited oil production since July and has since reduced production to about nine million barrels per day.
OPEC’s data this month highlighted a growing imbalance between demand and oil source due to production cuts, which could cause the biggest oil deficit since 2007 in the next quarter.
Saudi Arabia is under pressure to push oil costs to reach the $100 point as the country seeks to use its export earnings to diversify its economy away from oil.
In fact, the kingdom’s sovereign wealth fund plans to spend $40 billion a year on domestic investments, adding the structure of a futuristic city called Neom.
But market veteran Ed Yardeni wrote in a note Thursday that $100 worth of oil would hurt demand and threaten to trigger a global recession if consumers cut spending. It could also initiate an increase in crude production from non-OPEC countries.