Surging oil prices could cause demand to crumble, forcing Saudi Arabia to up production

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The end to Saudi Arabia's oil production cuts may be closer than investors anticipate, Bob McNally, founder of the Rapidan Energy Group, told Bloomberg TV on Thursday.

US crude prices hit their highest level for the year this week, but pulled back Thursday to $92.51 a barrel. Still, some in the industry have warned of even higher valuations to come — as much as $150 a barrel.

But according to McNally, persistently high oil prices may lead to plunging demand, something that Saudi Arabia will want to avoid.

"The odds are higher than the market is currently discounting that the Saudis will take their foot off the brake sooner," he said. "They do not want to deliberately over tighten the market, because if you get a spike, then you get the demand collapse and you get a bust. They don't want that."

Already, the world's top oil exporter has shown some openness to easing its oil production cuts, McNally said. For instance, during the last announcement about extending its cuts, Riyadh emphasized that output would be reviewed each month, and for the first time noted a possible production increase.

Any decision to lift the cuts may come as soon as October or November, he estimated.

Alongside its partners in the Organization of Petroleum Exporting Countries, the kingdom has limited oil output since July and has since slowed production to around 9 million barrels a day.

OPEC data from this month has highlighted a widening imbalance between oil demand and supply due to the production cuts, which could spark the biggest oil deficit since 2007 in the next quarter.

Saudi Arabia has an incentive to for oil prices to reach the $100 level, as the country looks to use export revenue to diversify its economy away from petroleum.

That's as the kingdom's sovereign wealth fund plans to spend $40 billion annually on domestic investments, which includes the construction of a futuristic city called Neom.

But market veteran Ed Yardeni wrote in a Thursday note that $100 oil will hurt demand and risks triggering a global recession if consumers cut spending. It could also initiate non-OPEC crude production to increase.

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