Saudi Arabia will extend its unilateral oil production cut by a month, keeping a supply cap amid lingering fears about the global economy. Its OPEC+ ally, Russia, also announced new restrictions on exports.
The kingdom will maintain the reduction of 1 million barrels per day, launched this month in addition to existing restrictions agreed with OPEC+, until August and could extend it further, according to a statement published by the Agency of Saudi Press. The country will pump about 9 million barrels a day, the lowest in several years, sacrificing sales volumes for what has so far been minimal reward in terms of higher prices.
Oil futures rallied after the announcement, with Brent crude up 0.9% to $76.12 a barrel at 11:27 a.m. in London.
The Saudi effort will be aided by Russia, which will cut oil exports by 500,000 barrels a day in August, Deputy Prime Minister Alexander Novak said in comments carried by his press service. Later, he added that the country will also aim to reduce production by this amount.
So far this year, Moscow has dragged its heels on cuts agreed with OPEC+ as it faces pressure to keep funds flowing for its war on Ukraine.
The 23-nation OPEC+ alliance aims to achieve balance in global oil markets and avoid inventory build-ups, UAE Energy Minister Suhail Al Mazrouei said in the state news agency WAM. The United Arab Emirates is the main member of the coalition.
No Options
“Faced with low investor confidence and very limited trade, Saudi Arabia had virtually no choice but to extend the production cut,” said Viktor Katona, chief crude oil analyst at the market intelligence firm Kpler Ltd.
Weak demand in China has limited crude to around $76 a barrel, below the level the International Monetary Fund believes Saudi Arabia needs to cover its budget. In this context, the extent of the kingdom’s cuts came as no surprise, as almost all traders and analysts polled by Bloomberg predicted this outcome.
Oil prices were expected to rebound this year, but have instead fallen about 11% on fears about the strength of the economy as interest rates rise. Wall Street forecasters, including Goldman Sachs Group Inc. and Morgan Stanley, have abandoned projections of crude oil returning to $100 a barrel.
Whatever is necessary
In theory, prolonged supply constraints should not be necessary as global oil markets look set to tighten in the second half of the year. OPEC’s Vienna-based research department predicts that global oil inventories are already on track to deplete at a rapid rate of about 2 million barrels per day.
However, the measures revealed by Riyadh and Moscow on Monday suggest they are wary of the narrative of an increasingly tight market. When he first announced the additional output cuts last month, Saudi Energy Minister Prince Abdulaziz bin Salman told reporters he would “do whatever it takes to bring stability to this market.”
Consumer nations such as the US have criticized the Organization of the Petroleum Exporting Countries and its allies for their policy of restricting supplies, accusing the cartel of exacerbating inflation and jeopardizing a fragile economic recovery. The International Energy Agency has condemned the group for “harassing” vulnerable consumers.
The Saudis indicated in their statement that further extensions are possible, and Prince Abdulaziz, who will address an OPEC-hosted energy conference in Vienna on Wednesday, has vowed to keep traders in “suspense” over the future plans
“There is little speculative shorting now to justify the extremely negative stance they have taken, so the Saudi moves should help normalize market positioning,” said Paul Horsnell, head of commodities research at Standard Chartered Plc.
