Saudi caps output until Sept as economy weighs: Update

Adds details on Saudi production in September in paragraphs 2, 6 & 7

Saudi Arabia will cap its crude production at around 9.6mn b/d through to September, and has reached out to its Opec and non-Opec partners to seek ways to stem the steep decline in oil prices since the start of August.

With macroeconomic indicators suggesting the potential for a slowdown in demand growth, Riyadh will maintain production this month and next at the same level as last month, around 9.6mn b/d, while its exports will remain below 7mn b/d, a Saudi source told Argus.

"Saudi Arabia and other producers will not allow prices to fall further," one Opec delegate said. The delegate said a number of options are being considered, but did not provide details.

Atlantic basin crude benchmark North Sea Dated has tumbled by more than $8/bl in the last eight days, closing at a seven-month low of $55.01/bl yesterday.

The 24-member coalition of Opec and non-Opec producer countries, collectively known as Opec+, face a dearth of feasible options beyond maintaining their collective output cuts, as they seek to reduce the global inventory overhang.

For its part, Saudi Arabia will continue overcomplying with its Opec+ commitments. In June, the country single-handedly exceeded Opec's 800,000 b/d output cut commitment under the broader agreement.

"September production will continue at the same level as for July and August," the Saudi source said. Demand for Saudi crude in September, as indicated by requests from buyers, came in 700,000 b/d higher than for August, but Saudi Arabia will not provide that, he said. "The main message is that we are seeing an increase in demand from all regions universally," the source said, pointing out that current Saudi output cuts also apply to all sales destinations.

He described reports that Riyadh would be cutting its September output by 700,000 b/d from August as inaccurate.

Key to the oil price fall of recent days is an escalation in the more than year-long US-China trade war, which threatens a further downgrade in the global economic growth outlook and raises the prospect of weakening oil demand growth for this year and next.

Trade tensions between Washington and Beijing escalated after US president Donald Trump last week threatened to impose 10pc tariffs on an additional $300bn/yr of Chinese imports from 1 September. This could jeopardise the next round of talks planned in Washington in early September.

Given all the macroeconomic uncertainties, forecasts for GDP growth next year range from 2.7pc to 3.5pc, which implies some 500,000 b/d of uncertainty for 2020 oil demand growth, according to Argus estimates.

"Another significant issue, in my view, is the value of the dollar," a Saudi official said. More expensive dollar-denominated crude can dampen demand from consumers, especially in emerging market countries.

Historically, Opec has implemented multiple production cuts when macro variables overwhelm the market, including during the financial crisis of 2008-09.

"We are not at that threshold yet," the official said.

The Opec+ Joint Ministerial Monitoring Committee (JMMC), which oversees compliance with the ongoing Opec+ production cuts, is scheduled to meet on 12 September in Abu Dhabi, with potential options aimed at supporting prices now likely to top the agenda.