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The significance of OPEC+ in the global oil market cannot be understated, as the alliance accounts for approximately 40% of the world’s crude oil production.
The impact of Saudi Arabia’s decision to cut oil output has been immediate with oil prices rising in response, reflecting the expectation of a tightening supply.
According to reports, both global benchmark Brent Crude Futures and US West Texas Intermediate (WTI) Futures experienced a rise of over 2% during early Asia trade on Monday. As of the latest update, global benchmark Brent futures were trading up 1.43% at $77.22 per barrel, while US WTI futures rose 1.5% to $72.86 per barrel.
Based on the background story, an official source from the Ministry of Energy in Saudi Arabia revealed that the Kingdom would reduce its crude oil production by one million barrels per day, starting in July.
With this additional cut, Saudi Arabia’s Energy Minister noted that the kingdom’s output will fall to 9 million barrels per day from roughly 10 million barrels in May. Saudi Arabia’s commitment to further voluntary production cuts comes in addition to the agreed-upon production levels set during the recent OPEC+ meeting held on June 4, 2023.
Furthermore, the Kingdom’s decision is also consistent with the voluntary cuts that OPEC+ members had earlier announced in April, extending them until the end of 2024. By implementing an additional cut of one million barrels per day, Saudi Arabia aims to strengthen the precautionary measures taken by OPEC+ countries to support market stability.
Response from Industry Participants
The significance of OPEC+ in the global oil market cannot be understated, as the alliance accounts for approximately 40% of the world’s crude oil production. Consequently, any production decisions made by OPEC+ members, including Saudi Arabia, can have a substantial impact on global oil prices.
The move by Saudi Arabia to reduce its oil production by 1 million barrels per day has garnered the interest of industry analysts. Bob McNally, the president of analysis firm Rapidan Energy stated that the market did not widely anticipate such a move.
McNally further emphasized that the market could witness significant global deficits in the second half of 2023, leading to a rise in crude oil prices. He predicted that crude prices could exceed $100 per barrel next year.
On the other hand, Helima Croft, the Managing Director at RBC Capital Markets highlighted that the willingness of Saudi Arabia to shoulder the production cut alone adds credibility to the initiative and signals the tangible removal of barrels from the market.
Future Outcomes on Oil Prices
Ed Morse, Citi’s global head of commodities research and managing director, has criticized Saudi Arabia’s recent OPEC+ activities.
Morse noted that the oil market will remain weak, largely due to disappointing demand in major consuming regions such as China, the European Union, and the US. However, he stated that there is a potential that supply will surpass demand growth in the future, causing oil prices to fall further. He even suggested that oil prices could go below $70 per barrel.
Meanwhile, the Commonwealth Bank of Australia (CBA) shares a similar view. CBA’s Vivek Dhar stated that if Brent futures sustainably drop below $70 per barrel or remain in the $70 to $75 range, Saudi Arabia is likely to extend its production cuts and possibly deepen them. CBA believes that the Saudi Arabian government will take action to support prices if they fall below a certain threshold.