Saudi Arabia – the world’s largest oil producer, will undertake voluntary crude oil output cuts which are set to kick in this month, starting from July 1, amid a tighter market which is currently reeling under the impact of sluggish global economic growth and further rate hike fears by global banks.
In the previous meeting of the Organization of the Petroleum Exporting Countries and its allies (OPEC+) on June 4, no changes in global oil output were announced for the remainder of this year. However, the world’s top oil exporter, Saudi Arabia output will decline to 9 million barrels per day from about 10 million barrels in May, as per its fresh production cuts set to kick in from July.
OPEC+ reached a deal on output policy and decided to reduce overall production targets from 2024 by a further total of 1.4 million barrels per day (bpd). Apart from Saudi, the rest of the OPEC producers agreed to extend earlier cuts in supply through the end of 2024.
Saudi Energy Minister Prince Abdulaziz said the cut of 1 million bpd by Riyadh could be extended beyond July if needed. “This is a Saudi lollipop,” he said. The deal came after a last-minute fight with African members over how their cuts are measured, which delayed the meeting by several hours.
In addition, Saudi Aramco – the world’s largest oil company, believes market fundamentals remain “sound” for the second half as demand from emerging markets led by China and India will offset recession risk in developed markets, CEO Amin Nasser said last week.
“Despite the recession risks in several OECD countries, the economies of developing countries – especially China and India – are driving healthy oil demand growth of more than 2 million bpd this year,” he added. ‘’Although China faces economic headwinds, the transport and petrochemical sectors are still showing signs of demand growth.”
In recent months, crude oil prices have been hovering around $75 per barrel compared to the record highs of $140 per barrel in March 2022 as a result of the shock on commodity markets due to the Russia-Ukraine war.
Oil prices settled higher in the previous session but posted its fourth straight quarterly decline as investors worried that the sluggish global economic activity could impact overall fuel demand.
Brent crude futures are down about 15 per cent since the start of the year as rising interest rates hit investor appetite, while China’s promising economic recovery has faltered after several months of softer-than-expected consumption, production and property market data.
According to analysts, oil prices will struggle for traction this year as global economic headwinds linger. Still, some analysts expect the market to tighten in the second half of 2023 partly due to ongoing OPEC+ supply cuts and Saudi Arabia’s voluntary reduction for July.
“Despite the announcements of two fresh rounds of cuts from OPEC /Saudi Arabia, crude prices have largely remained below $80 a barrel as the market has been driven less by fundamentals and more by macroeconomic concerns,” HSBC analysts said in a note.
“We think this will continue to be the case for part of the summer, although the deep deficit of around 2.3 million barrels forecast for 2H23 should help to spur some upwards price momentum,” according to HSBC analysts.
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Updated: 01 Jul 2023, 10:44 PM IST