Saudi, UAE, Kuwait extra cuts mean oil storage capacity will not be exceeded: Experts

The additional oil production cuts for June announced by three GCC producers on Monday on top of what they already agreed to with OPEC allies will help the world avoid global storage tank tops, according to experts.

A storage tank top happens when there’s no more room to store crude.

An extra 1.2 million barrel per day (bpd) cut will not re-balance the market, but will surely remove strain from the storage infrastructure and buy time to wait for the demand rebound, said Paola Rodriguez Masiu, Rystad Energy’s Senior Oil Markets analyst.

Read more: Saudi Energy Minister: Oil demand picking up as countries ease coronavirus lockdowns

“Before this news broke, we were expecting global onshore stocks to build by an astonishing 9 and 3 million barrels per day during May 20 and June 20, respectively, really pushing the limits of the available storage capacity,” she said.

Saudi Arabia, the UAE, and Kuwait announced on Monday to voluntarily reduce their crude oil production, on top of what they had already committed to under a pact by the OPEC+ group of major oil producing countries.

Saudi Arabia’s energy ministry has directed its national oil company Aramco to reduce its crude oil production for June by an extra 1 million bpd from the April production level, bringing the total production cut in the Kingdom to around 4.8 million bpd.

The Kingdom’s production for June, after both its targeted and voluntary cuts, will be 7.5 million bpd, a Saudi Arabian energy ministry official told Reuters.

The UAE and Kuwait joined the Kingdom by announcing voluntary cuts of 100,000 bpd and 80,000 bpd, respectively for June, on top of what it already agreed with OPEC allies.

The cuts aim to restore supply and demand balance where the coronavirus has exacerbated imbalances in the market.

Read more:

UAE to cut additional oil output of 100,000 bpd in June, says energy minister

Kuwait joins Saudi Arabia in extra oil cuts with additional 80,000 barrels per day

“We have to be ahead of the curve,” Saudi Oil Minister Prince Abdulaziz bin Salman told Bloomberg News in a phone interview on Monday. “The voluntary cuts will further expedite the re-balancing process.”

Prince Abdulaziz said that he was observing some signs of increased oil demand, particularly for gasoline, as citizens emerging from lockdowns opted to drive alone in their cars, rather than ride the subway or trains.

Masiu said crude producers will have to wait a bit longer to capitalize from the coming uptick in product demand.

“It should not be expected that crude intake will immediately rebound as much as demand because refiners are likely to first draw products out of inventory that have been accumulating over the last two months,” she said.

She added that the additional unilateral cuts by Saudi Arabia, the UAE, and Kuwait were not totally surprising, and could prompt sub-compliance from fellow OPEC+ members, such as Iraq.

Renowned energy market expert Anas Alhajji said Saudi Arabia indicated about a month ago that it might resort to an additional oil production cut in June if needed.

“Now it has been determined that the additional cut is needed. The announcement comes before OPEC+ meeting in June and tells a lot about the meeting,” he said on twitter.

“We do not need to go back to normal to show recovering demand. We hit a bottom during the lockdown. What we are seeing right now is enough to prevent us from reaching tanks tops and we might see storage draws too,” he added.