Oil Prices Soar as Saudi Arabia Announces Additional Production Cuts

Updated: 05 June 2023

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A key member of OPEC, Saudi Arabia, has lowered its daily oil production by an additional million barrels, causing the price of crude oil to rise again.

Saudi Arabia Leads OPEC+ in Implementing Further Oil Production Cuts

At their Sunday meeting, it was announced that OPEC and its partner countries, collectively known as OPEC+, will cut oil production for the rest of the year. In July, Saudi Arabia, the world’s biggest oil exporter, announced more voluntary cuts.

Oil production in Saudi Arabia is expected to drop from around 10 million barrels per day in May to 9 million barrels daily in June.

During early Asia trade on Monday, global benchmark Brent futures and U.S. West Texas Intermediate (WTI) futures rose more than 2%. However, they later dipped lower by mid-morning. Brent futures are trading up 1.43% at $77.22 per barrel, while WTI futures have risen 1.5% to $72.86 per barrel.

As OPEC+ accounts for approximately 40% of global crude production, decisions regarding production levels can greatly impact oil prices.

In April, several oil cartels announced a collective drop in production of 1.66 million barrels daily. Analysts, including Goldman Sachs, predicted the alliance would maintain unchanged output levels.

Unprecedented Failure: Saudis’ Struggle to Rally OPEC+ for Price Boost

Over the weekend, there was an “ultimate failure of the Saudis” in bringing all OPEC+ members together to accomplish “what was required to bring better prices into the market”.

“The market did not widely expect the Saudi decision to cut production by 1 million barrels per day unilaterally”. In an email following the decision, Rapidan Energy’s Bob McNally said.

“It once again demonstrated that Saudi Arabia is willing to act unilaterally to stabilize oil prices,” According to McNally, the oil titan unilaterally cut production by 1 million barrels per day in January 2021.

“We see large global deficits materializing in the second half of 2023 and crude prices exceeding $100 next year,” he added.

Kang Wu, the head of global demand and Asia analytics at S&P Global Commodity Insights, says global oil demand will rise during the summer season in the Northern Hemisphere, reducing oil inventories. As a result, oil prices should stay high.

According to Helima Croft, RBC Capital Markets Managing Director, Saudi Arabia’s reducing its output adds credibility to the production cuts.

“The fact that [Saudi Arabia] is willing to shoulder it alone adds to the credibility of the cut and signals real barrels coming off the market,” according to Croft’s report. While some have viewed the kingdom’s move optimistically, others have not.

Brent futures are expected to stay within the $75 to $70 per barrel range, or even fall below that level, if Saudi Arabia continues to cut production. “We think Saudi Arabia will look to deepen production cuts if Brent futures sustainably drop below $US70/bbl,” says CBA’s Vivek Dhar.

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