Business

Oil Prices Rise as a Result of the Saudi Plan to Intensify Output Cuts Beginning in July

After top crude exporter, Saudi Arabia pledged to cut production by an additional 1 million barrels per day (bpd) beginning in July to combat macroeconomic headwinds that have depressed markets, oil prices increased by more than $1 per barrel on Monday.

After reaching a session high of $78.73, Brent crude futures were up $1.37, or 1.8 percent, at $77.50 a barrel at 1100 GMT.

After reaching an intraday high of $75.06, U.S. West Texas Intermediate crude increased by $1.39, or 1.9 percent, to $73.13.

After the Saudi energy ministry announced that the kingdom’s output would decrease to approximately 9 million barrels per day (bpd) in July from 10 million bpd in May, both contracts saw gains of more than 2% on Friday. This reduction is the largest in years for Saudi Arabia.

The voluntary cut is on top of a broader deal by the Organization of the Petroleum Exporting Countries (OPEC) and partners including Russia to restrict supply into 2024 as the OPEC+ producer group looks to help flagging oil costs.

OPEC+ supplies 40% of the world’s crude and has reduced its production target by 3.66 million barrels per day or 3.6% of global demand.

According to Suvro Sarkar, the leader of the energy sector team at DBS Bank, “Saudi remains keener than most other members in terms of ensuring oil prices above $80 per barrel, which is essential for balancing its own fiscal budget for the year.”

SEB analyst Bjarne Schieldrop said the market reaction on Monday was generally muffled after the past slice by OPEC+ neglected to set up costs for a really long time.

“The oil price is ticking carefully upwards today as investors are cautious after having burned their fingers in the (previous) production cut-induced rally to (almost) $90 a barrel, which later faltered.”

Consultancy Rystad Energy said the extra Saudi cut is probably going to develop the market shortfall to 3 million bpd in July, which could push costs higher in the coming weeks.

Analysts at Goldman Sachs said that the meeting was “moderately bullish” for the oil markets and could raise Brent prices in December 2023 by $1 to $6 a barrel, depending on how long Saudi Arabia keeps its output at 9 million barrels per day over the next six months.

“The immediate market impact of this Saudi cut is likely lower, as drawing inventories takes time, and the market likely already put some meaningful probability on a cut today,” the bank’s analysts added.

However, the lower production targets for Russia, Nigeria, and Angola bring them into line with their actual production levels, so many of the OPEC+ reductions will have little effect.

On the other hand, the United Arab Emirates (UAE) was given permission to increase its production targets by 200,000 bpd to 3.22 million bpd in order to take advantage of its larger capacity.

Raeesa Sayyad
Published by
Raeesa Sayyad
Tags: oil prices

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