The global oil market experienced a surge in prices as Saudi Arabia, the world’s top crude exporter, announced an extension of its unilateral production cuts. The Kingdom’s decision to extend the voluntary cut of one million barrels per day (bpd) into August aims to support the stability and balance of the oil market. Oil prices rose by 1% in response to the news.
Also read: Brent Crude Oil – Live Charts and Prices.
Saudi Arabia’s Voluntary Production Cut Extension
Saudi Arabia, through an official source from the Ministry of Energy, revealed its plan to extend the voluntary production cut of one million bpd, which has been in place since July, for another month. The extension is expected to continue beyond August if necessary. As a result, the Kingdom’s production for August 2023 will be approximately nine million bpd.
The decision to extend the production cuts did not come as a surprise to the market. In early June, OPEC+ producers, including Saudi Arabia, agreed to maintain the current cuts until the end of 2024. However, Saudi Arabia decided to take additional measures by voluntarily reducing its production by one million bpd in July. The Saudi Energy Minister, Prince Abdulaziz bin Salman, had previously hinted at the possibility of an extension.
Objective of the Production Cut Extension
The Kingdom’s decision to extend the production cuts aims to reinforce the precautionary efforts made by OPEC+ countries to support the stability and balance of the oil market. Saudi Arabia has been striving to prop up oil prices for months due to concerns about the global economy. Benchmark prices have fallen below $80 per barrel, a level estimated by the International Monetary Fund (IMF) as the breakeven price for Saudi Arabia to balance its budget in 2023.
Also read: WTI Oil Price: West Texas Intermediate (WTI).
Despite Saudi Arabia’s previous efforts, Brent oil prices have been trading below the $80 per barrel mark since April. Therefore, the Kingdom’s decision to extend the production cuts reflects its determination to maintain stability in the oil market and mitigate potential economic challenges.
Impact on Oil Prices and Market Response
The announcement of the production cut extension by Saudi Arabia had an immediate impact on oil prices. Following the news, Brent crude, the global oil benchmark, rose by 0.89% to reach $76.06 per barrel, while the US benchmark, WTI Crude, increased by 0.93% to $71.30 per barrel.
The market response indicates that investors and traders are optimistic about the impact of Saudi Arabia’s production cut extension on oil prices. The move is expected to provide support and potentially lead to a gradual increase in prices.
Russia’s Voluntary Production Cut
In addition to Saudi Arabia’s decision, Russia, one of the world’s largest oil producers, also announced its intention to make voluntary production cuts. Russia’s Deputy Prime Minister, Alexander Novak, stated that the country would cut supplies by 500,000 barrels per day in August through reduced exports. This reduction deepens the existing cut of the same size that Moscow implemented in March.
Russia’s decision to voluntarily reduce production further contributes to the collective efforts of OPEC+ countries to stabilize the oil market. These measures are driven by concerns over the global economic slowdown and its impact on energy demand.
Saudi Arabia’s Breakeven Price and Budget Impact
Saudi Arabia’s breakeven price, the level at which it can balance its budget, is estimated to be around $81 per barrel by the IMF. Falling oil prices have placed the Kingdom’s budget under pressure, with a deficit projected for this year after reporting a surplus in 2022 for the first time in almost a decade.
To mitigate the economic impact, Saudi Arabia has been proactive in implementing production cuts and pursuing strategies to support oil prices. The extension of the production cut is part of the Kingdom’s ongoing efforts to stabilize its budget and manage potential financial challenges.
OPEC+ Collaboration and Production Cuts
The voluntary production cuts by Saudi Arabia and Russia are part of the collaborative efforts of OPEC+ countries. OPEC, the Organization of the Petroleum Exporting Countries, along with Russia and other smaller producers, formed an alliance known as OPEC+. This alliance aims to coordinate oil production levels to stabilize the market and ensure a balanced supply-demand dynamic.
During a meeting in June, OPEC+ members, including Saudi Arabia, agreed to extend production cuts until the end of 2024. Riyadh also announced the extension of a separate production cut of 500,000 barrels per day until the end of next year, reducing the Kingdom’s total oil output to nine million barrels per day.
Global Economic Outlook and Oil Demand Concerns
The decision to extend production cuts by Saudi Arabia and Russia reflects concerns over the global economic outlook and its impact on oil demand. The Chinese economy, the world’s second-largest, has shown only modest growth in recent months, with some firms cutting staff due to weaker-than-expected sales.
The disappointing outlook for global demand, coupled with the uncertainties surrounding the post-pandemic economic recovery, has prompted OPEC+ members to take proactive measures to stabilize the oil market. The production cuts are aimed at balancing supply and demand and preventing a further decline in oil prices.
Also read these FintechZoom articles: