Saudi Arabia and Opec+ partner Russia extend oil supply cuts to August to prop up prices
- The 1 million barrels per day cut to production will see Saudi Arabia’s output drop to about 9 million bpd, the lowest in several years
- Russia will join the Saudi effort and reduce oil exports by 500,000 bpd in August, according to Deputy Prime Minister Alexander Novak
Saudi Arabia will prolong its unilateral oil production cut by one month, keeping a lid on supply amid persisting fears over the global economy. Its Opec+ ally Russia also announced fresh curbs on exports.
The kingdom will maintain the 1 million barrel per day (bpd) reduction – launched this month on top of existing curbs agreed with Opec+ – into August and could extend it further, according to a statement published by state-run Saudi Press Agency. The country will pump about 9 million bpd, the lowest in several years, sacrificing sales volumes for what has so far been a minimal reward in terms of higher prices.
Oil futures rose after the announcement, but trimmed those gains later. Brent crude was 0.5 per cent higher at US$75.76 a barrel late Monday afternoon in London.
The Saudi effort will be assisted by Russia, which will reduce oil exports by 500,000 bpd in August, Deputy Prime Minister Alexander Novak said in comments published by his press service. He later added that the country will also aim to reduce production by this amount. Algeria will reduce output by 20,000 bpd next month.
So far this year, Moscow has dragged its heels on cutbacks agreed with Opec+ as it faces pressure to keep funds flowing to its war against Ukraine.
The 23-nation Opec+ alliance aims to achieve balance in global oil markets and avoid an accumulation in inventories, United Arab Emirates Energy Minister Suhail Al Mazrouei told the state-run WAM news agency. The UAE is a leading member of the coalition.
“Faced with little investor confidence and very narrow rangebound trading, Saudi Arabia had virtually no other option but to extend the production cut,” said Viktor Katona, head crude analyst at market intelligence firm Kpler.
Lacklustre demand in China has capped crude near US$76 a barrel, below the level that the International Monetary Fund believes Saudi Arabia needs to cover its budget. Against this backdrop, the extension of the kingdom’s cuts was no surprise, with almost all traders and analysts surveyed by Bloomberg predicting this outcome.
Oil prices were widely expected to rally this year, but have instead sagged about 11 per cent because of fears about the strength of the economy as interest rates climb. Wall Street forecasters including Goldman Sachs and Morgan Stanley have abandoned projections for the return of US$100-a-barrel crude.
In theory, the prolonged supply curbs should not be needed as global oil markets look set to tighten during the second half of the year. Opec’s Vienna-based research department is projecting that world oil inventories are already on track to deplete at a brisk clip of around 2 million bpd.
Yet the measures revealed by Riyadh and Moscow on Monday suggest they are wary about the narrative of an increasingly tightening market. When he first announced the extra production cuts last month, Saudi Energy Minister Prince Abdulaziz bin Salman told reporters that he “will do whatever is necessary to bring stability to this market.”
The sacrifice comes at a cost to the Saudi economy, which is set to contract by 1.8 per cent this year after expanding nearly 9 per cent in 2022, according to Bloomberg Economics. The non-oil sector is likely to grow by 4 per cent, analysts said on June 27.
Consuming nations like the US have railed against Opec and its allies for their policy of constricting supplies, accusing the cartel of exacerbating inflation and endangering a fragile economic recovery. The International Energy Agency has condemned the group for laying “siege” to vulnerable consumers.
The Saudis indicated in their statement that further extensions are possible, and Prince Abdulaziz – who will address an energy conference hosted by Opec in Vienna on Wednesday – has promised to keep traders in “suspense” on future plans.
“There’s little now for speculative shorts to justify the extreme negative position they’ve taken, so the Saudi measures should help normalise positioning in the market,” said Paul Horsnell, head of commodities research at Standard Chartered.
