Oil prices increased in trade after Saudi Arabia decided to execute extra production cutbacks of a million barrels per day. The Organization of the Petroleum Exporting Countries (OPEC) and its allies, sometimes known as OPEC+, kept to its annual schedule of reducing oil output. The world’s largest oil exporter, Saudi Arabia, however, promised further voluntary production restrictions beginning in July.
The Saudi oil ministry said that the country’s daily production will drop from around 10 million barrels in May to 9 million barrels per day. Both the U.S. West Texas Intermediate futures and the benchmark Brent futures saw increases of more than 2% as a result of this statement, with the price of a barrel of Brent increasing to $77.22 during early Asian trading on Monday.
Since OPEC+ accounts for a sizeable portion of world petroleum output (about 40%), its production choices have a substantial impact on oil prices. The partnership was anticipated by the market to continue producing at its present levels, as many experts, including those at Goldman Sachs, had forecast.
It was unexpected that Saudi Arabia would decide to unilaterally reduce output by one million barrels per day. It was an example of Saudi Arabia’s determination to take autonomous action to stabilize oil prices, according to Bob McNally, head of the analytical company Rapidan Energy. When Saudi Arabia unilaterally lowered production by one million barrels per day in January 2021, McNally mentioned that action as an example. He also forecasted significant worldwide supply shortages for the second half of 2023, which may push oil prices beyond $100 per barrel the following year.
During the summer months in the Northern Hemisphere, Kang Wu, head of global demand and Asia analytics at S&P Global Commodity Insights, expects a considerable increase in global oil demand. It is anticipated that this increase in demand would cause a reduction in oil stockpiles and support higher oil prices in the next months.
While some market players may be focused on Saudi Arabia’s unilateral production cut, Helima Croft, Managing Director at RBC Capital Markets, recognized that it provides credibility to the entire reduction efforts. According to Croft, Saudi Arabia’s readiness to shoulder the whole load indicates a real decrease in the amount of oil production. But not all specialists are as upbeat as they claim to be.
The present oil market, according to Ed Morse, managing director and global head of commodities research at Citi, is “extremely weak” as a result of sluggish demand from key oil consumers including China, the European Union, and the United States. Morse emphasized the likelihood of supply growing faster than demand growth and predicted that oil prices might drop below $70 per barrel, citing an impending recession as a contributing cause.
According to Commonwealth Bank of Australia (CBA), Saudi Arabia may prolong its production restrictions for July if Brent prices stably fall below the $70 to $75 per barrel area. According to CBA analyst Vivek Dhar, in such a situation Saudi Arabia is likely to further reduce oil supply.
In conclusion, the decision by Saudi Arabia to undertake further production restrictions has resulted in an increase in oil prices. The forecast for oil prices, however, is still impacted by market uncertainty, sluggish demand in important areas, and possible supply-demand imbalances.