Saudi Arabia to likely roll over 1 million bpd output cut into October: What lies ahead for oil prices?

The Organization of the Petroleum Exporting Countries and allies (OPEC+) led by Russia, agreed a broad deal in June to curtail the supplies until the end of 2024. Saudi Arabia at the time, alone announced the additional voluntary cut which brought its oil production to a multi-year low of 9 million bpd.

Earlier this month, the kingdom extended the voluntary cut into September, with the country’s energy ministry saying that it could be “extended, or extended and deepened”.

Russia will also cut oil exports by 300,000 bpd in September, announced Deputy Prime Minister Alexander Novak shortly after the Saudi Arabia’s decision. Brent oil prices in July were up 14 per cent on the previous month, the biggest monthly increase since January 2022. 

Prices in August are trending about 3 per cent lower on the previous month as China demand worries weigh. China has also been drawing on record inventories amassed earlier this year as higher oil prices drive refiners in the world’s biggest oil importer to scale back purchases, according to analysts quoted in the report.

Why are Saudi Arabia and Russia cutting oil supply?

The Saudis are particularly keen to boost oil prices in order to fund Vision 2030, an ambitious plan to overhaul the kingdom’s economy, reduce its dependence on oil and create jobs for a young population. The plans include several massive infrastructure projects, including the construction of a futuristic $500 billion city called Neom, according to The Associated Press.

Higher prices would also help Russian President Vladimir Putin fund his war on Ukraine, as Western countries have used a price cap to try to cut into Moscow’s revenues, as per the report. Western sanctions mean Moscow is forced to sell its oil at a discount to countries like China and India. Its estimated export revenue fell by $1.4 billion to $13.3 billion in May, down 36 per cent from a year ago, the International Energy Agency said in a report in June.

What lies ahead for oil prices?

Morgan Stanley expects Brent crude prices to be well supported around $80 per barrel as the oil market is likely to remain in a deficit in the second of half of 2023 before returning to a small surplus next year.

“Strong refined products markets and deep OPEC cuts have been supporting crude oil prices,” analysts at the bank said in a note last week. Although OPEC’s production cuts will have a bullish impact on oil prices in the near future, spare capacity is at its highest in 20 years and a decline in the group’s market share could weigh on prices in the longer term, added Morgan Stanley.

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Updated: 26 Aug 2023, 09:47 PM IST