Riyadh’s 10% reduction in output suggests that it is willing to sacrifice its market share to maintain prices
VIENNA — Saudi Arabia cut 10% off its oil production over the weekend to boost prices. The results so far indicate that it may be a costly gamble.
Saudi Energy Minister Prince Abdulaziz bin Salman, who warned speculators OPEC+ would cut oil production once again, announced on Sunday that the world’s largest crude exporter will reduce its own output by 1 million barrels in July if other cartel member refuse to join. Close to half of the oil produced in the world is produced by the Organization of the Petroleum Exporting Countries (OPEC) and its Russian-led allies. A cut in output was expected to prop up prices amid fears that a slowing economy would crimp energy demand.
Oil prices rose sharply on Monday but lost most of their gains. Brent crude, an international benchmark for oil, rose by 0.8% and settled at $76.71 per barrel. Oil prices are still about 18% below what they were in October when OPEC+ shocked the market with its first output cuts. Some members, such as Saudi Arabia and Russia expanded those cuts in April.
Saudi officials who are familiar with the issue acknowledged that the increase in oil prices on Monday was lower than Abdulaziz had expected. Abdulaziz defended his decision to reduce output and fight against short sellers following the heated meeting.
Abdulaziz’s attention has recently been focused on Wall Street short-sellers whose bets could cause prices to drop. He warned them late last month to “watch out,” and some analysts took this as a sign that OPEC+ would reduce production at their June 4 meeting.
Saudi Arabia will be able to produce 9 million barrels per day with the cut Abdulaziz announced. This is the lowest level since June 2021, and has not been seen for the last 10 years. It is clear that Riyadh would sacrifice its market share in order to maintain prices. The officials who are familiar with this matter said that the increase in oil prices will not compensate for the revenue loss caused by the decrease in production.
Saudi Arabia faces the possibility of losing market share on key markets, such as China, to the United Arab Emirates (UAE) and Russia. Both continue to pump large quantities of cheaper crude oil into the market in spite of their promises not to. Both the U.A.E. OPEC delegates stated that both the U.A.E.
Data from the past shows that OPEC+ members cheat on their production quotas. Delegates said that some African states who were forced to give up their quotas next year told their colleagues they did not plan to adhere to these limits.
David Fyfe is the chief economist of commodities data firm Argus. He says that Monday’s prices were underwhelming because a month-long output cut does not resolve the various uncertainties weighing on markets. Fyfe also said that Saudi Arabia’s extra cut was a factor, as it led to the perception that Riyadh had failed to convince other members of the cartel to join in.
Fyfe stated that the danger lies in the fact that OPEC may not be able react quickly if the Atlantic Basin recession is deeper and lasts longer than anticipated. This time, there appears to be some debate about concerted reductions for the second half. He added that “the demand-side problems have not gone away,” pointing out the weak activity in Chinese real estate and manufacturing, which are both major consumers of diesel.
Saudi Aramco surprised everyone again on Monday by raising its crude oil prices for the month of July. Analysts and traders expected Saudi Aramco to lower its official prices in order to compete with cheaper alternatives such as Russian crude on the market, amid a modest outlook for demand.
The pressure on the first Saudi prince in charge of the oil ministry is heightened by the focus on maintaining higher oil prices. Abdulaziz, his half-brother Crown Prince Mohammed Bin Salman’s, must maintain crude prices to make his plans economically viable.
Analysts believe the kingdom will need oil prices over $80 per barrel to balance out its budget expansion.
Commonwealth Bank Australia says Saudi Arabia will likely extend its cuts if Brent oil remains stuck at $70-$75 per barrel. It would also deepen the cuts if Brent prices drop below $70. Goldman Sachs estimates that oil prices will rise by $1 per barrel for each month the cuts remain in place.
Saudi Arabia’s cut will add significantly to the market deficit expectations. International Energy Agency had already predicted a deficit of 1.9 million barrels a day by the third quarter. Rystad Energy says that this deficit could reach 3 million barrels per day following the Saudi cuts.
Analysts agree that this should keep the recent decline in oil prices at bay, but they are less certain about whether prices will increase.
Richard Bronze, director of geopolitics for the consulting firm Energy Aspects, said: “This is a difficult market to manage.” “A lot is due to factors outside their control, like the macroeconomic outlook.”
Bronze continued, “I don’t believe they will have as much success or influence as they had in early 2021.”