In a surprise move, Saudi Arabia, the world’s leading oil exporter, announced a voluntary reduction of oil production by one million barrels per day, driving oil prices up by 2.5%. This decision comes despite the Organization of the Petroleum Exporting Countries and its partners (OPEC+) maintaining the previously planned production cuts for the remainder of the year.
Saudi Arabia’s decision, implemented from July, means that the kingdom’s output will fall to 9 million barrels per day, down from around 10 million barrels in May, according to the country’s energy ministry.
In response to the announcement, global benchmark Brent futures surged 2.4% to $78.00 a barrel on Monday during early Asia trade. U.S. West Texas Intermediate futures witnessed a similar uptick, rising 2.5% to $73.53 per barrel. Given that OPEC+ is responsible for approximately 40% of the world’s crude oil production, such decisions can considerably influence global oil prices.
On April 3, several OPEC+ members had committed to a combined production decrease of 1.66 million barrels per day until the end of this year. Analysts, including those from Goldman Sachs, had predicted that this figure would remain unchanged.
Bob McNally, president of Rapidan Energy, expressed surprise at the Saudi decision, stating that the unilateral cut in production was unexpected. He said, “It once again demonstrated that Saudi Arabia is willing to act unilaterally to stabilize oil prices.” McNally highlighted the January 2021 instance when the Saudi’s reduced their output by one million barrels per day as a similar move.
Forecasting future trends, McNally anticipates significant global deficits in the second half of 2023, leading to crude prices potentially exceeding $100 per barrel next year. His sentiments are echoed by Kang Wu, Head of Global Demand and Asia Analytics at S&P Global Commodity Insight. Wu expects the upcoming summer demand surge in the Northern Hemisphere to result in an oil inventory draw, supporting higher oil prices over the following months.
However, the weekend’s developments have not been universally praised. Ed Morse, Citi’s global head of commodities research and managing director, called it an “ultimate failure of the Saudis” to coordinate with all OPEC+ members to improve market prices. He pointed out that demand in the three largest oil-consuming regions – China, the European Union, and the United States – has been disappointingly weak, and raised concerns over a possible recession impacting demand growth.
Commonwealth Bank of Australia (CBA) believes that Saudi Arabia could further extend the production cuts beyond July if Brent futures linger in the $70 to $75 per barrel range, or even dip below that. “We think Saudi Arabia will look to deepen production cuts if Brent futures sustainably drop below $US70/bbl,” stated Vivek Dhar, a CBA analyst, in a research note on Monday.
As global economies and industry players grapple with these changes, the direction of oil markets in the coming months will be a crucial barometer of economic health and geopolitical influence.
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