Analysts Talk Saudi Oil Cut Extension
The markets immediately reacted to Saudi Arabia’s production cut extension announcement yesterday, Rystad Energy Senior Vice President Jorge Leon and Senior Analyst Patricio Valdivieso outlined in an oil trading alert sent to Rigzone this morning.
In that alert, the analysts highlighted that ICE Brent front month prices increased to $76.5 per barrel, from $74.8 per barrel, “minutes after the announcement”.
“Back in June, Saudi Arabia announced a voluntary cut of one million barrels per day (on top of the 500,000 barrel per day voluntary cut announced in April, running from May until December 2023), which was initially planned for July, but that could be extended, as we had mentioned in our June 4 OPEC+ alert,” the analysts said in the latest Rystad alert.
“Rystad Energy believes that this move reinforces our thesis that this mechanism of a possible monthly extension of Saudi cuts limits downside price pressure for the rest of the year, regardless of the macroeconomic environment,” they added.
According to a chart included in the alert, Rystad now forecasts that Saudi crude production will come in at nine million barrels per day in July and August. Leon and Valdivieso highlighted in the alert that this is the country’s lowest level since June 2021 and over two million barrels per day lower than September 2022.
The chart shows that Saudi Arabia’s crude production was 10 million barrels per day in June and 11 million barrels per day back in September last year. Looking ahead, the chart forecasts that Saudi crude output will hit 9.9 million barrels per day in September this year, then 10 million barrels per day in October, November, and December 2023.
“With this extension of Saudi cuts into August, our liquids balances now show a jaw-dropping 3.6 million barrel per day deficit for August, following a 3.0 million barrel per day deficit in July,” Leon and Valdivieso said in Rystad’s latest alert.
“Overall, the estimated market deficit for the second half of 2023 is 2.5 million barrels per day now,” the analysts added.
Examining a possible extension of the Saudi voluntary cut of one million barrels per day beyond August, the analysts said in the alert that “this will depend on several factors, such as the macroeconomic environment, price evolution, and demand recovery”.
“Our latest oil market weekly report shows that global road traffic has actually fallen below 2019 levels in the last three weeks,” the analysts added.
“Global aviation traffic has struggled to recover and is still 20 percent below 2019 levels,” the analysts continued.
A statement posted on Saudi Arabia’s ministry of energy website on July 3 said “an official source from the ministry of energy announced that the kingdom of Saudi Arabia will extend the voluntary cut of one million barrels per day, which has gone into implementation in July, for another month to include the month of August”.
“In effect, the kingdom’s production for the month of August 2023 will be approximately nine million barrels per day. The source also noted that this cut is in addition to the voluntary cut previously announced by the kingdom in April 2023, which extends until the end of December 2024,” the statement added.
“The source confirmed that this additional voluntary cut comes to reinforce the precautionary efforts made by OPEC plus countries with the aim of supporting the stability and balance of oil markets,” the statement went on to note.
A statement posted on the ministry’s site on June 4 noted that “an official source in the ministry of energy in the kingdom of Saudi Arabia announced that … the kingdom will implement an additional voluntary cut in its production of crude oil, amounting to one million barrels per day, starting in July for a month that can be extended”.
A separate statement posted on its site on the same day said “an official source in the ministry of energy announced that, as a precautionary measure, the kingdom of Saudi Arabia will extend its voluntary cut of 500,000 barrels per day until the end of December 2024”.
The price of Brent closed at $74.65 per barrel on July 3, after closing at $74.9 per barrel on June 30. The commodity’s highest 2023 close, so far, was seen on January 23, at $88.19 per barrel, and its lowest 2023 close, so far, was seen on June 12, at $71.84 per barrel. At the time of writing, Brent is trading at $75.46 per barrel.