Saudi Arabia’s recent announcement regarding a deep cut in oil output for July, in addition to the extended OPEC+ agreement, reflects the country’s determination to bolster declining oil prices.
The energy ministry of Saudi Arabia disclosed that its daily output would be reduced to 9 million barrels per day (bpd) in July, marking the largest output reduction in years and a significant drop from May’s production level of approximately 10 million bpd.
During a news conference, Saudi Energy Minister Prince Abdulaziz referred to this decision as a “Saudi lollipop,” explaining that it was aimed at adding an element of suspense and surprise to the market.
The goal is to prevent market participants from accurately predicting Saudi Arabia’s actions and to introduce stability into the oil market, which is currently in need of such measures.
OPEC+, a coalition comprising the Organization of the Petroleum Exporting Countries (OPEC) and allied oil-producing nations led by Russia, collectively accounts for around 40% of the world’s crude oil production. Consequently, decisions made by OPEC+ have a significant impact on global oil prices.
In April, when OPEC+ unexpectedly announced a supply cut, international benchmark Brent crude experienced a brief spike of approximately $9.
However, since then, prices have faced downward pressure due to concerns about the global economic weakness and its impact on oil demand. As of the end of the week, Brent crude was priced at $76.
One of Saudi Arabia’s unique advantages within OPEC+ is its ample spare capacity and storage, enabling the country to adjust its output levels easily. This flexibility allows Saudi Arabia to respond rapidly to market conditions.
In the early stages of the pandemic in 2020, when the oil market faced an excess supply crisis, Saudi Arabia swiftly implemented record output cuts to rebalance the market.
The existing OPEC+ production cuts, amounting to 3.66 million bpd or 3.6% of global demand, have been in effect since last year.
These cuts include a reduction of 2 million bpd agreed upon in the past and voluntary cuts of 1.66 million bpd announced in April.
In a seven-hour meeting held on Sunday, OPEC+ reached a comprehensive agreement on output policy, deciding to extend these cuts until the end of 2024.
Accusations of price manipulation and the undermining of the global economy have been leveled against OPEC, particularly by Western nations, intensifying since Russia’s invasion of Ukraine in February 2022.
OPEC insiders argue that the monetary policies pursued by Western countries over the past decade have contributed to inflation, forcing oil-producing nations to take measures to safeguard the value of their primary export.
Market analysts perceive Sunday’s decision by OPEC+ as a clear indication of the group’s commitment to supporting oil prices and countering speculators.
It serves as a signal that OPEC+ is determined to establish a price floor in the market, reinforcing their intent to stabilize prices and thwart speculative activities.
Consequently, when trading resumes on Monday, a strong start is anticipated in the oil market.
In addition to extending the current production cuts, OPEC+ members agreed to further reduce overall production targets by 1.4 million bpd starting from January 2024. However, it is important to note that some of these reductions may not result in a tangible impact, as adjustments were made to the targets of Russia, Nigeria, and Angola to align them with their existing production levels. Conversely, the United Arab Emirates was granted a slight increase in its output targets.
In light of recent economic stability, which could potentially indicate a plateau in the markets, prominent investors may opt to secure their positions by focusing on their existing share portfolios rather than actively seeking new.