Markets reacted immediately to Saudi Arabia’s announcement of an extension to the production cut yesterday, Rystad Energy Senior Vice President Jorge Leon and Senior Analyst Patricio Valdivieso explained in a trading alert from oil shipped this morning to Rigzone.
In that alert, analysts noted that first-month ICE Brent prices rose to $76.5 a barrel, from $74.8 a barrel, “minutes after the announcement.”
“In June, Saudi Arabia announced a voluntary cut of one million barrels per day (in addition to the voluntary cut of 500,000 barrels per day announced in April, running from May to December 2023), which it was initially planned for July, but this could be extended, as we had mentioned in our June 4 OPEC+ alert,” analysts said in Rystad’s latest alert.
“Rystad Energy believes this move reinforces our thesis that this mechanism of a possible monthly extension of Saudi cuts limits downward pressure on prices for the rest of the year, regardless of the macroeconomic environment,” they added .
According to a chart included in the alert, Rystad now expects Saudi crude output to reach nine million barrels per day in July and August. Leon and Valdivieso noted in the alert that this is the lowest level in the country since June 2021 and more than two million barrels per day below September 2022.
The chart shows that Saudi Arabia’s crude production was 10 million barrels per day in June and 11 million barrels per day in September last year. Looking ahead, the chart predicts Saudi crude production will reach 9.9 million barrels per day in September this year, and then 10 million barrels per day in October, November and December 2023.
“With this extension of the Saudi cuts in August, our liquids balances now show a shortfall of 3.6 million barrels per day in August, after a shortfall of 3.0 million barrels per day in July,” Leon and Valdivieso said in Rystad’s latest alert.
“Overall, the estimated market shortfall for the second half of 2023 is now 2.5 million barrels per day,” the analysts added.
Examining a possible extension of the Saudi voluntary cut of 1 million barrels per day beyond August, analysts said in the alert that “this will depend on several factors, including the macroeconomic environment, the evolution of prices and the recovery of demand”.
“Our latest weekly oil market report shows that global road traffic has fallen below 2019 levels in the past three weeks,” the analysts added.
“Global aviation traffic has struggled to recover and is still 20 percent below 2019 levels,” the analysts continued.
A statement posted on the Saudi Arabian energy ministry website on July 3 said that “an official source in the energy ministry announced that the kingdom of Saudi Arabia will extend the voluntary cut of one million barrels per day, which has been launched in July. for one more month to include the month of August”.
“In effect, the kingdom’s production for the month of August 2023 will be approximately nine million barrels per day. The source also noted that this cut is in addition to the voluntary cut previously announced by the kingdom in April 2023, which extends until the end of December 2024,” the statement added.
“The source confirmed that this additional voluntary cut comes to reinforce the precautionary efforts made by OPEC and other countries with the aim of supporting the stability and balance of the oil markets,” the statement added.
A statement posted on the ministry’s website on June 4 noted that “an official source in the Kingdom of Saudi Arabia’s energy ministry announced that … the kingdom will implement an additional voluntary cut in its crude oil production, for an amount of one million barrels per day, starting in July for an extendable month”.
A separate statement posted on its site the same day said “an official energy ministry source announced that as a precautionary measure, the Kingdom of Saudi Arabia will extend its voluntary cut of 500,000 barrels per day until the end of of December 2024.”.
The price of Brent closed at $74.65 a barrel on July 3, after closing at $74.9 a barrel on June 30. The commodity’s highest close in 2023, so far, was seen on Jan. 23 at $88.19 a barrel, and its lowest close in 2023, so far, was seen on Jan. 12. June, at $71.84 a barrel. At the time of writing, Brent is trading at $75.46 per barrel.
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