The past two OPEC+ production cuts have been accompanied by a kneejerk reaction by the markets that sent crude oil prices climbing before falling back down to roughly the same levels they were previously at (just north of US$70 per barrel).

As such, you could be forgiven for thinking that Saudi Arabia’s commitment to maintaining its 1 million barrel of oil per day cut for another month – into August – and Russia’s decision last week to cut its output by another 500,000 barrels per day cut would be more of the same.

However, such optimism (for consumers at least) might not be warranted.

There are several factors why this might the case, starting with the benchmark Brent crude rising above the US$80 per barrel mark for the first time since early May, which could be a sign that supply is indeed tightening and that demand is expected to grow.

But wait, you might ask, why would an extra month of Saudi production cuts tighten supply if the first didn’t? Surely the difference isn’t Russia’s extra cuts?

Well, it is important to note that while decisions to cut or raise production will impact on markets, the flow of physical product takes a little longer to be impacted.

A single month with 1MMbbl/d less oil flowing into the market might be offset by floating supplies of oil out there, two months could exhaust those additional quantities.

The build-up of the US inventory by 5.9MMbbl for the week to 7 July, while good for building confidence in the US, really only accounts for about six days of shortfall from Saudi Arabia – though the US itself is insulated to a large degree thanks to its own extensive shale oil production, which has hit a record output of 12.61MMbbl/d.

Adding weight to this theory about the exhausting of spare supplies, Reuters estimated that should the cuts be implemented in full, they will reduce global production and expected inventories by as much as 45MMbbl by the end of August – adding to the 30MMbbl that Saudi Arabia is removing this month.

This will reverse the previous accumulation of inventories, which saw advanced economies increase commercial stocks held in reserve by 75MMbbl in the first five months of 2023.

While this is offset by expectations of poorer than expected economic growth from North America, Europe and China, stronger economic growth will tighten the crude market significantly, which could drive a rapid increase in prices.

Nuclear still unfeasible

Meanwhile, everyone’s favourite hot potato – nuclear power – has been criticised as being too expensive and slow according to the Net Zero Australia report penned by a partnership between major academic institutions and the management consultancy Nous Group.

In a blow (that will likely be ignored) to nuclear hopefuls – including opposition leader Peter Dutton – the report said that to reduce renewable energy targets in the belief that nuclear power will be deployed later at scale created a risk of not achieving net zero, or doing so at an “excessive cost”.

Nous Group principal Richard Bolt said that only a dramatic fall in costs and prolonged renewable constraints would prompt a rethink into the viability of nuclear power.

Modular reactors anyone?

Gas cap not as far reaching as feared

Meanwhile, there is growing realisation that the Australian Government’s Mandatory Gas Code of Conduct might not have quite as big an impact on gas producers as initially feared despite extending the $12 per gigajoule gas price cap out until 2025.

For starters, the code introduces even more exemptions with short term supply and supply from smaller producers being automatically exempt while LNG imports are now exempt.

All together, Energy Quest estimates that only about 6% of total east coast gas production (including LNG) and a more substantial 21% of domestic supply will be impacted by the cap.

Despite this, the energy consultancy believes that the east coast gas market will remain structurally short of supply by the end of the decade and possibly sooner if new domestic supplies or LNG imports are not established.

With gas demand forecast to remain for some time to come yet – and likely needed to firm the grid even with growing renewables use, the concerns about gas supply in this environment are certainly warranted.

However, it is also important to note that gas producers have been making do (and indeed profiting) with gas prices below the $12/GJ mark.

So while it might impact on record profits, it is entirely likely there are still projects that can still deliver the required return on investment to be economically attractive.

That junior companies are exempt from the $12/GJ price ceiling makes this even more likely.

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