Inspenet, July 28, 2023.
Saudi Arabia plans to extend the oil supply cut by 1 million barrels through September in an effort to fuel a gradual recovery in crude prices. This additional cut was implemented this month, on top of production restrictions already put in place with other OPEC+ members with the aim of supporting oil markets amid a delicate economic situation.
This measure has already been extended through August and, according to a Bloomberg survey of 22 traders, analysts and refiners, 15 of them forecast that it will last until September. Previous news about the kingdom’s voluntary production cuts was announced via state media during the first week of the month.
What does this cut in oil supply mean?
In the last month, oil prices have risen by about 12%, reaching around $83 a barrel in London . This increase is due to the recovery of world fuel consumption and the restrictions on production applied by the Organization of Petroleum Exporting Countries, which has generated an expected tightness in global markets.
This outlook has provided some relief to consumers in the United States and other parts of the world, who faced an unprecedented wave of inflation last year. Furthermore, this situation could allow Saudi Arabia to ease restrictions on its oil supply. However, prices could still be considered low for the kingdom, as crude oil would need to hit $100 a barrel to finance its ambitious spending plans, according to a Bloomberg Economics analysis.
“The kingdom will want to see a prolonged rise towards $90 a barrel and possibly an improvement in Chinese economic data to start considering putting 1 million barrels a day back on the market,” said Tamas Varga, an analyst at brokerage PVM. Oil Associates Ltd. in London.
The supply shortfall in global oil markets is expected to widen significantly in the coming months, according to various forecasters. The Paris-based International Energy Agency, which provides advice to major economies, estimates that during the second half of the year there will be a shortage of about 1.7 million barrels a day .
As a result, six of the survey participants anticipate that Saudi Arabia could ease its further output cut, restoring around 250,000 to 500,000 barrels per day in September. This measure could be a response to the forecast deficit and would seek to balance supply and demand in the oil market.
“There is ample evidence that Saudi Arabia will start to undo the cuts in September,” said James Davis, director of short-term global oil services at consultancy FGE. “The market is crying out for these barrels, and refineries are fighting to get hold of them.”
Shipments of types of oil similar to those sold by Saudi Arabia, which are typically heavier and more sulfurous than other varieties, have commanded a higher price, according to traders.
If Saudi Arabia gradually eases the restrictions in September, it would not be the first time they have defyed market expectations. Saudi Energy Minister Prince Abdulaziz bin Salman has earned a reputation for surprising oil speculators with unexpected moves, albeit generally in an upward direction.
On Monday, Saudi Arabia experienced the biggest slowdown in growth among major economies according to the International Monetary Fund, which projects the country’s gross domestic product will expand just 1.9% this year.
Keeping a tight rein on supplies may also help Riyadh promote discipline among other members of the OPEC+ alliance .
Russia, an important member of the alliance, has finally started to comply with the agreed supply restrictions after delaying their implementation for several months. Until recently, Moscow was more focused on maximizing oil sales to finance its invasion of Ukraine, but data tracking tanker shipments indicates that exports have dropped significantly in recent weeks, hitting a six-month low. of 3.1 million barrels per day.
Key OPEC+ nations will hold an online meeting on August 4 to assess the oil market situation. The full group of 23 countries will meet again at the end of November.
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