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NEW YORK Amid this week's carnage in crude oil markets with Brent futures slumping to 18-month lows, bullish traders have held out hope that Saudi Arabia will bail out the market with a quick cutback in oil production. They are likely to be disappointed.
Saudi Arabia has driven oil into a supply surplus this year by ratcheting up its own production to near 10 million barrels per day.
The market, initially slow to recognize the ballooning of global oil inventories triggered by this Saudi surge, is now gripped by fear that overproduction will continue into the second half of the year.
Setting aside all the other considerations that may or may not be driving Saudi oil policy, the simple fact is the timing of Western sanctions against Iran is a significant obstacle to any Saudi production adjustment.
For the most part, it will be impossible to tell what effect, if any, U.S. and European sanctions will have on Iranian oil exports until some time has passed following the July 1 implementation date.
That in turn makes it very difficult to accurately forecast the global oil supply and demand balance for the second half of the year.
The normal seasonal upswing in oil demand in the second half of the year and lower Iranian output may put oil supply and demand back into balance by themselves.
It is also easy to imagine a scenario where a quick cut in Saudi exports in July combined with a sharper-than-expected fall in Iranian oil shipments combine to flip global crude supplies back into a deficit, sending oil prices surging.
But Saudi Arabia's recent pronouncements about the benefits of lower oil prices to the slowing world economy suggest a more gradual policy is operative right now.
In other words, Riyadh is probably more likely than not to be willing to err on the side of overproducing for a month or more to wait for the sake a better understanding of the world market balance before it makes a decisive move.
CUT MAY BE DEEP
However, the foregoing is not to say Saudi Arabia will tread softly for the rest of the year. Past experience has shown the kingdom willing to cut oil production quickly and deeply once it perceives a significant level of oversupply in the market.
There are plenty of signs that prompt oil demand is feeble. Wretched naphtha pricing in Asia, for instance, is a strong signal that regional plastics demand is soft. That points to an overall weakness in industrial activity.
This in turn has added to the weakness in sweet crude pricing in the Atlantic basin and repressed refinery runs in Europe, where many plants are configured to produce naphtha for petrochemical demand.
Anecdotal evidence also suggests that a good chunk of this year's global oil inventory growth has gone into strategic stockpiles in Asia.
That sort of buying looks like normal "demand" but has the potential to evaporate once storage facilities are full. Once the tanks are topped off, there's no more need to buy.
Indeed, Saudi Arabia itself has been storing oil.
The kingdom reported record high crude oil stocks of 284 million barrels in April, according to the Joint Oil Data Initiative database, up from 258 million barrels in the same month a year ago.
Should it become clear that world crude oil stocks continue to grind higher even as we move into the northern hemisphere summer, a Saudi move to cut production should not come as a surprise.
(Robert Campbell is a Reuters market analyst. The views expressed are his own)
(Editing by Marguerita Choy)