Saudi Arabia Expected to Extend Oil Supply Cut into September
Posted 27/07/2023 13:06
Saudi Arabia is anticipated to continue its 1 million-barrel oil supply cut into September as part of its efforts to support a tentative recovery in crude prices. The additional cutback was introduced this month in addition to the output curbs already implemented by fellow OPEC+ producers to stabilize oil markets amid a fragile economic backdrop.
The measure, which has already been extended into August, is likely to persist into September, according to a survey conducted by Bloomberg involving 22 traders, analysts, and refiners. The two previous announcements about the kingdom's voluntary production cuts were made through state media in the first week of the month.
Oil prices have risen approximately 12 percent in the past month to around $83 a barrel in London, thanks to the recovery in global fuel consumption and output restraint by the Organization of Petroleum Exporting Countries. This has resulted in a long-awaited tightening of world markets, providing some relief to consumers in the US and other regions from last year's inflation surge.
However, for Saudi Arabia, the current prices may still be too low. The kingdom requires $100-a-barrel crude to finance its ambitious spending plans, as indicated by Bloomberg Economics. Analysts suggest that for the kingdom to consider restoring the 1 million barrels per day back into the market, it would likely want to see oil prices rise protractedly toward $90 a barrel and witness improvements in Chinese economic data.
Many forecasters expect the supply shortfall in global oil markets to deepen significantly in the coming months. The International Energy Agency in Paris forecasts a shortage of about 1.7 million barrels a day during the second half of the year.
Some participants in the survey believe that the supply shortfall will prompt Saudi Arabia to gradually taper off its additional cut, restoring approximately 250,000 to 500,000 barrels a day of halted production in September. Refiners are said to be eager to secure these barrels as they are in high demand.
Despite the market expectations, Saudi Arabia has a track record of springing surprises, particularly with bullish moves, to wrong-foot oil speculators. However, the financial pressures and the need for higher oil prices to support ambitious economic and social transformations may influence the kingdom to maintain a tight rein on supplies.
Moreover, Riyadh's strict approach to supply curbs may serve as a means to encourage discipline among other members of the OPEC+ alliance. Russia, a key member of the group, recently began implementing its pledged share of supply curbs after hesitating for several months. The country had been prioritizing oil sales to fund its invasion of Ukraine, but recent data shows a decline in shipments to a six-month low of 3.1 million barrels a day.
On August 4, key nations from the OPEC+ alliance will hold an online meeting to assess oil market conditions, with the full 23-nation group scheduled to convene in late November. The continuation of the Saudi supply cut into September could have significant implications for global oil markets and the ongoing efforts to stabilize prices.