Saudi Arabia will significantly reduce its oil production in July, in addition to the broader OPEC+ agreement to limit supply through 2024, as the group seeks to boost oil prices.
The Saudi Arabian energy ministry has announced a reduction in the country’s oil output to 9 million barrels per day (bpd) for July, compared to approximately 10 million bpd in May. In addition, Opec+ has declared that targets will decrease by an additional 1.4 million bpd, leading to a new output target of 40.46 million bpd by 2024.
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Opec+, a term referring to the Organization of Petroleum Exporting Countries and its allies, had already agreed to reduce output by two million barrels per day, or roughly 2% of global demand. As Opec+ controls approximately 40% of the world’s crude energy, its decisions can have a significant effect on oil prices. “This is a grand day for us, because the quality of the agreement is unprecedented,” Saudi Energy Minister Abdulaziz bin Salman said in a news conference, adding that the new set of production targets is “much more transparent and much fairer”.
Saudi Energy Minister calls it “a Saudi lollipop”
“This is a Saudi lollipop,” Prince Abdulaziz told a news conference. “We wanted to ice the cake. We always want to add suspense. We don’t want people to try to predict what we do… This market needs stabilization”. He added that Riyadh could extend the limit beyond July if necessary. Brent concluded trading for the week at $76 on Friday.
Saudi Arabia is the only OPEC+ member with substantial spare capacity and storage to easily increase or decrease output. It was able to respond swiftly to the excess supply that weakened the market at the onset of the pandemic in 2020, when the group of producers initiated record output cuts.
An extended cut till 2024?
In April, OPEC implemented a voluntary production limit of 1.6 million barrels per day (bpd) to increase oil prices. However, the price increase was temporary, as Brent crude fell below $75 per barrel and US crude declined below $70 per barrel. This decline in oil prices has provided respite for consumers worldwide and made it cheaper for US drivers to fill their tanks. OPEC+ has implemented total cuts of 3.66 million bpd, or 3.6% of global demand, including 2 million bpd agreed upon last year and 1.66 million bpd of additional voluntary cuts in April.
These cutbacks, which were originally scheduled to expire at the end of 2023, have now been extended until the end of 2024. The decision to extend cuts demonstrates OPEC+’s dedication to maintaining price stability and discouraging speculators. In addition, the group agreed to reduce production targets by an additional 1.4 million barrels per day beginning in January 2024, with certain countries and the United Arab Emirates permitted to increase output targets.
Monday markets felt the heat of output cuts
Oil prices increased on Monday following Saudi Arabia’s announcement of a 1 million-barrel-per-day production reduction beginning in July. Futures on Brent crude reached $77.15 per barrel, while futures on U.S. West Texas Intermediate crude rose to $72.76 per barrel. Brent crude oil rose as much as 2.4% in Asia trade on Monday before stabilizing at around $77 per barrel.
The additional reduction by Saudi Arabia is anticipated to increase the market deficit to more than 3 million barrels per day in July, which could contribute to higher prices. Recent events were viewed as moderately favourable for oil markets and may increase Brent prices for December 2023 by $1 to $6 per barrel. In contrast, the United Arab Emirates (UAE) was permitted to increase its daily production targets by 200,000 barrels. In the meantime, the number of oil rigs in the United States decreased to 555, the lowest level since April 2022, as drilling activity stalled due to lower prices and higher costs.
A known yet unexpected call by Saudi Arabia?
Saudi Arabia surprised everyone by voluntarily reducing production by one million barrels per day during the OPEC+ meeting, when most members were reluctant to reduce output. To support its economic diversification efforts, the kingdom seeks to keep crude prices above $80 per barrel. The action reflects concerns about future fuel demand in the context of uncertain global economic conditions and falling oil prices resulting from Russia’s invasion of Ukraine.
The West has accused OPEC of manipulating prices and aligning itself with Russia, while OPEC insiders contend that the West’s monetary policies have compelled them to safeguard the value of their primary export. However, it is uncertain when the global economy will recover thoroughly and increase its fuel demand. Oil producers require revenue for their state budgets, but higher prices can lead to inflation and impede economic growth. To finance ambitious development projects, such as the Neom city initiative in the desert, the Saudis require sustained high oil revenues. Higher oil prices may also prompt central banks to raise interest rates to combat inflation, which may have a negative impact on consumer purchasing power and business investments.
In conclusion, Saudi Arabia’s announcement of significant oil production cuts in July, along with the extension of OPEC+’s output reduction agreement until the end of 2024, is expected to have a notable impact on oil prices. These measures reflect the collective efforts of OPEC+ to stabilize the market and address concerns of excess supply. The additional reduction by Saudi Arabia is anticipated to create a market deficit, potentially leading to higher oil prices. However, the long-term effects of increased prices on global economic conditions and fuel demand remain uncertain.
