Oil prices surged on news that Saudi Arabia will deepen production cuts, taking more barrels out of circulation from one of the world’s top exporters. According to OPEc’s energy minister, Saudi Arabia plans to reduce output by an extra 1 million barrels a day from next month – in addition to voluntary reductions already implemented voluntarily – and adds that this move may be extended if necessary.
OPEC+ (OPEC plus Russia), is currently restricting output in order to prevent global inventories from reaching excessive levels. Riyadh’s announcement to increase efforts suggests it may forgoing some profits short term if this move helps revive oil prices and encourage oil buyers to take on greater risk and move barrels from storage into use.
Helima Croft, commodities strategist at RBC Capital Markets, notes that Saudi’s willingness to shoulder an additional cut alone lends credibility to the agreement. She writes in her research note: “Saudi Arabia being willing to do this alone further strengthens the integrity of their cuts.”
But these additional cuts may not be sufficient to convince oil refiners to withdraw barrels from storage, and should they continue for too long, demand will decline, jeopardizing the goal of increasing prices to help balance out OPEC+ budgets.
Saudi cuts will increase demand in July, yet will have to contend with seasonal fluctuations and an uptick in fuel production from non-OPEC sources, including the US. Longer term, however, slow economic growth and vehicle electrification could dampen demand growth by 2024.
Analysts remain hopeful that Saudi action and rising demand will produce tighter markets and lift prices this year, however their worries stem from lack of coordination from other OPEC+ members and US shale boom that could undermine efforts. They anticipate reevaluating OPEC+ deal in late June or July along with Russian production levels as well as possible sanctions responses against Iran; it remains to be seen if OPEC makes enough of an impactful statement to keep market prices rising or not; 2023 Bloomberg L.P. All rights are reserved by all means; therefore there’s no guarantee it’ll work this time! 2023 Bloomberg L.P. All rights are reserved and all material may not be published, broadcast, rewritten or redistributed without prior consent by Bloomberg L.P.