Saudi Oil Production Steady at Current Prices

Even with crude prices now well over $100 there's no sign of demand for Saudi crude falling off. I expect they will continue to act as swing producer, setting price and letting quantity adjust, until a large enough supply response forces their production down below perhaps 6 million bpd.

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This is what happened in the 1970's-80's when the Saudis were also acting as swing producer. But when crude hit $40 the supply response hit as well, and over the next few years total OPEC production was cut by about 15 million barrels per day in an attempt to support price. But the supply response was too large and prices collapsed to the $10- $15 range, where for all practical purposes, they remained until net supply dwindled, as evidenced by increased OPEC production, until the Saudi's were again in control as swing producer.

Today all but the Saudis are pumping at or near full capacity, so it's only necessary to watch Saudi production to monitor net demand for crude. Of course they deny they are setting price. But they also say that they sell crude only to refiners, and by posting price. They further state they don't sell in the spot market. Enough said?

In the recent past, the markets have failed to understand this dynamic, and I have yet to hear a commentator mention it. In fact, when Saudi crude output increases, markets most often mistakenly assume it means the Saudis are increasing output and hitting bids, when in fact it's a sign demand at current prices has further elevated and prices are more likely to continue to rise.

This is not a 'conspiracy theory' but a simple point of market logic. A monopolist (at the margin, we need all of the Saudis 9.5 million barrels per day) they are necessarily price setter and can't act otherwise even if they wanted to without suffering a substantial loss of revenue.