Oil market to tighten as kingdom’s production cuts take effect and Russia slows exports
Saudi Arabia is set to fall below Russia as the largest oil producer in the OPEC+ alliance as its production cuts begin to bite, tightening the oil market just as prices appear to be turning higher, the International Energy Agency said.
The Gulf kingdom, the de facto leader of the Organization of the Petroleum Exporting Countries, has in recent months slashed its oil output, sacrificing its market share within the oil producers’ group in an attempt to buoy low oil prices that have crimped its revenue.
The cuts, which have largely not included other members of the oil cartel or its allies in a wider group known as OPEC+, have so far been undermined by stronger output from non-OPEC+ producers such as the U.S.
But those rival supply increases look set to come to an end, just as a unilateral 1-million-barrel-a-day production cut by the Saudis is set to begin this month while Russian output also appears to be declining, though at a slower pace, the IEA said in its monthly market report.
The 1-million-barrel-a-day cut, which Riyadh said last week that it would extend into August too, will see the major oil producer’s output slip to a two-year low of nine million barrels a day, and make it the second-largest producer in the OPEC+ alliance, below Russia for the first time since early 2022.
Barring the artificially low production levels during the Covid-19 pandemic, the cuts will see Saudi production slip to its lowest level since 2011.
In bearing the brunt of the supply cuts, Saudi Arabia and its Energy Minister Abdulaziz bin Salman have gone all in on a risky strategy to support the kingdom’s oil revenue at the expense of its share of the market. Analysts estimate Riyadh needs oil prices of around $80 a barrel to balance its state budget and fund lavish infrastructure projects.
Russia too has pledged to cut its oil output but has been slow to implement the measures. That appears to be changing, the IEA said, with the nation’s oil exports slumping by 600,000 barrels a day in June to 7.3 million barrels a day, its lowest level since March 2021. However, Russia could be keeping its production levels steady to satisfy domestic consumers while reducing its exports, the IEA said.
The Saudis’ unilateral move came after cuts undertaken in concert with the wider OPEC+ group largely failed to have any impact on declining oil prices. The group agreed in April to slash output by around 1.6 million barrels a day, adding to a 2-million-barrel-a-day cut in October 2022.
U.S. oil output has risen by 610,000 barrels a day since those cuts first came into effect, while Iran, an OPEC member which is bound by the group production targets, has used the opportunity to boost its output by 530,000 barrels a day, the IEA said.
With those supply increases likely to have peaked, analysts say the Saudi cuts and Russia’s declining oil exports now appear to be having the desired effect: tightening the market and lifting oil prices. Brent crude, the international oil benchmark, has in recent days risen back above $80 a barrel for the first time since late April.
The IEA said demand for OPEC+ crude is set to exceed the group’s supply by 2 million barrels a day this month, and rise to 3 million barrels a day in August. Meanwhile, oil reserves are declining, leaving limited spare barrels to meet demand.
Oil demand is expected to grow by 2.2 million barrels a day this year to 102.1 million barrels a day and expand by a further 1.1 million barrels a day next year, the IEA said.
The IEA expects available supplies to lag behind this increase in oil demand, leading to a 2-million-barrel-a-day deficit this quarter. The IEA expects oil supplies to rise by 1.6 million barrels a day this year to 101.5 million barrels a day, and increase by 1.2 million barrels a day next year.