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26 July 2023

Saudi Arabia's Oil Production Cut Extension

Saudi Arabia is poised to prolong its 1 million-barrel-per-day reduction in oil production through September, aiming to nurture a fragile rebound in crude prices.

In an effort to bolster oil markets amid a delicate economic landscape, Riyadh introduced this supplementary production cut in conjunction with its existing output restrictions, which it has been coordinating with fellow OPEC+ producers.

This move has already been extended into August, and according to a Bloomberg survey involving 22 traders, analysts, and refiners, 15 of them anticipate its continuation into September. Traditionally, the Saudi kingdom has announced its voluntary production cuts through state media in the initial week of each month.

Over the past month, oil prices have surged by approximately 12%, reaching around $83 per barrel in London. This upturn can be attributed to the recovery in global fuel consumption and the concerted output restraint executed by the Organization of Petroleum Exporting Countries, which has finally led to the long-anticipated tightening of global markets.

This respite in oil prices is offering relief to consumers in the United States and beyond, offsetting the unprecedented inflationary wave experienced last year. It might also grant Saudi Arabia some latitude to ease its supply restrictions. However, Bloomberg Economics contends that the current prices might still fall short of Saudi Arabia's desired threshold, as the nation requires crude oil priced at $100 per barrel to finance its ambitious spending plans.

Analyst Tamas Varga from PVM Oil Associates Ltd. in London suggests, "The kingdom will want to see a sustained climb toward $90 a barrel and potentially an improvement in Chinese economic data before considering the reintroduction of the 1 million barrels per day into the market."

Numerous forecasters anticipate a substantial exacerbation of the supply deficit in the global oil markets in the coming months. The International Energy Agency in Paris, which provides counsel to major economies, estimates a shortage of about 1.7 million barrels per day during the latter half of the year.

Within the surveyed experts, six participants anticipate that this circumstance will prompt Saudi Arabia to gradually ease its supplementary cutback by reinstating approximately 250,000 to 500,000 barrels per day of halted production in September.

James Davis, Director of Short-Term Global Oil Services at FGE, suggests, "There is compelling evidence for Saudi Arabia to initiate the unwinding of the cuts in September. The market is in dire need of these additional barrels, and refiners are racing to secure them."

Traders note that cargoes of crude with similar attributes to those sold by Saudi Arabia — which tend to be heavier and higher in sulfur content than other varieties — have been commanding a premium.

Should Saudi Arabia decide to phase out the production cuts in September, it wouldn't be the first instance of the nation defying market expectations. Saudi Energy Minister Prince Abdulaziz bin Salman has garnered a reputation for unexpected moves that catch oil speculators off guard, although these actions have historically leaned toward more bullish maneuvers.

Maintaining strict control over oil supplies could also enable Riyadh to cultivate discipline among its counterparts within the OPEC+ coalition.

Russia, a pivotal member of the group, recently commenced the implementation of its committed share of the collective supply curbs after months of hesitation. Moscow had previously prioritized maximizing oil sales to fund its activities in Ukraine, but recent tanker tracking data indicates a significant drop in shipments to a six-month low of 3.1 million barrels per day.

Notably, key nations from the OPEC+ alliance are scheduled for a virtual meeting on August 4 to assess prevailing oil market conditions. The full assembly of the 23-nation group is slated to convene in late November.