Analysts predict that a worldwide deficit in crude oil supply will deepen in the third quarter, as Saudi Arabia, the leading global exporter, has pledged additional output cuts starting in July. This move is expected to drive Brent crude prices toward the $100 per barrel mark by the year-end.
On Monday, oil prices surged by more than $1 per barrel following the announcement by the Saudi energy ministry. It revealed that Saudi Arabia’s oil output would decrease to 9 million barrels per day (bpd) in July, down from approximately 10 million bpd in May. This reduction represents the largest output cut by the kingdom in years.
The Saudi voluntary cut comes in addition to a broader agreement reached by the Organization of the Petroleum Exporting Countries (OPEC) and their allies, including Russia, to extend production cuts until 2024. This collective effort aims to bolster declining oil prices.
In a note, Helima Croft from RBC Capital stated, “Saudi Arabia has a proven history of implementing significant cuts. Therefore, we anticipate the full unilateral cut of 1 million bpd to impact the market in July, effectively doubling the actual physical reduction witnessed since October by the producer group.”
Analysts believe that this decision will lead to tighter supplies and establish a price floor of $70 per barrel. However, the immediate impact on prices is expected to be modest, as it will take time for inventories to deplete.
Vivek Dhar, an analyst at Commonwealth Bank of Australia, noted, “With Saudi Arabia protecting oil prices from declining too sharply through production cuts, we anticipate a potential supply shortfall later this year.” Dhar further projected that Brent futures would rise to $85 per barrel by the fourth quarter of 2023, even considering a modest recovery in Chinese demand.
Goldman Sachs analysts Daan Struyven and Callum Bruce described the OPEC+ meeting as “moderately bullish,” offsetting some bearish risks to the bank’s December 2023 price forecast of $95 per barrel. These risks include higher-than-anticipated supply from Russia, Iran, and Venezuela, as well as weaker-than-expected demand from China.
ANZ highlighted the increased likelihood of a strong crude price rally due to significant supply tightening in the latter half of the year, provided the U.S. Federal Reserve pauses interest rate hikes and macroeconomic challenges subside. ANZ analysts Daniel Hynes and Soni Kumari maintained their year-end target of $100 per barrel for Brent, stating that investors are likely to make bullish investments, relying on Saudi Arabia and OPEC to support the market when faced with obstacles. They did mention that price gains may be limited until signs of tightening in the physical market emerge.
In contrast, the United Arab Emirates (UAE) received permission to raise its output targets by approximately 200,000 bpd to reach 3.22 million bpd. Meanwhile, Russia, African nations, and other smaller producers reduced their quotas to align with their actual production levels.
Helima Croft from RBC suggested that concerns about ADNOC, the UAE’s national oil company, potentially exiting the producer group and maximizing its investments in expanding spare capacity and the Murban price benchmark have been quelled. This was accomplished by granting a quota adjustment of 200,000 bpd for 2024, thus resolving the issue of its OPEC membership, at least for now.
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