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Saudi Oil Cutback as OPEC Again Cuts Demand View

Source: Reuters 9/10/2014, Location: Middle East

Top oil exporter Saudi Arabia told OPEC it reduced its oil output in August by 400,000 barrels per day (bpd), a cutback coinciding with a drop in oil prices towards the kingdom's preferred level of $100 a barrel.

In a monthly report issued on Wednesday, the Organization of the Petroleum Exporting Countries also cut its forecasts for demand for OPEC crude this year and next, pointing to a supply surplus of more than 1 million bpd in 2015 if OPEC keeps output at current levels.

Oil prices have slid due to concern about weakening demand and ample supplies, raising the question of whether Saudi Arabia, holder of the world's largest spare output capacity, will curb output. Brent crude fell below $100 on Monday for the first time in 14 months.

Riyadh, supported by Kuwait and the United Arab Emirates, has boosted supply informally to cover for unplanned outages in other OPEC members in recent months including in Libya, which is now seeing its production recover.

Saudi Arabia told OPEC that it produced 9.597 million bpd in August, down from 10.005 million bpd in July. Still, analysts noted its output often falls when domestic demand for air conditioning declines from its summer peak and lower production does not necessarily mean lower exports.

"I think we can be pretty sure the Saudis are cutting," said Samuel Ciszuk, analyst at the Swedish energy agency. "But maybe the crude burning has come down a bit and I'm sceptical that they have reduced exports by as much as 400,000 bpd."

So far, OPEC officials have not expressed a pressing concern about the drop in prices, seeing it as a temporary dip and predicting prices will rise as higher seasonal demand kicks in due to colder weather.

Kuwait's OPEC governor said on Wednesday she expected prices to rise and maintain the $100-a-barrel level.

OPEC also published production figures from secondary sources, a legacy of past OPEC disagreements about countries' reported output figures. The sources include consultants and industry media.

According to these, Saudi Arabia cut output by 55,000 bpd to 9.86 million bpd in August but overall OPEC output rose to 30.35 million bpd, due to recovery in Libya and higher exports from Angola.

With OPEC now forecasting global demand for its crude of 29.20 million bpd - 160,000 bpd less than previously thought - the report indicates supply will exceed demand by 1.15 million bpd next year should OPEC keep pumping at August's rate.

Rising supply outside OPEC, particularly the United States due to its shale energy boom, has squeezed OPEC's market share. U.S. crude output averaged 8.6 million bpd in August, the highest since 1986, government figures showed on Tuesday.

OPEC's next meeting to review output policy is in November. The meetings have become less of a focus for traders than informal output tweaks and unplanned outages in recent years, as the meetings have not changed OPEC's official output target.

Analysts at consultancy JBC Energy doubt Saudi Arabia is willing to cut exports sharply on its own given concerns over market share and the strength of demand, as well as OPEC's ability to agree a swift collective cutback.

"OPEC as a group is very unlikely to cut as we believe there to be too many internal issues to allow for a swift and coordinated reaction," JBC said. "We think that OPEC may not react at all until prices fall below $90."

Bank of America Merrill Lynch, in a report titled "Does Saudi want $85 oil?" said developments such as the advance of Islamic State could force a rethink of oil policy by Saudi Arabia, which has publicly endorsed $100 oil since early 2012.

In the report, OPEC also cut its 2014 global oil demand growth forecast for a third straight month. It expects demand to rise by 1.05 million bpd, down 50,000 bpd from last month. OPEC trimmed next year's growth estimate by 20,000 bpd.

Another closely watched report on global supply and demand is due on Thursday from the International Energy Agency, adviser to industrialised countries.

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