Saudi Arabia cuts production, crude oil prices could approach $100

Saudi Arabia, the world's top oil exporter, is cutting production, which could cause a global supply shortage later this year.

Brent and WTI crude oil prices rose 5% and 3.2% this morning, respectively, after Saudi Arabia announced a voluntary production cut of another 1 million barrels per day in July to stabilize the oil market. Accordingly, the country's production will be only 9 million barrels per day in July, down from 10 million barrels in May. This is the country's sharpest decline in many years.

The remaining members of the Organization of the Petroleum Exporting Countries and its allies (OPEC+), including Russia, also pledged to maintain the current cuts (announced in April) until the end of 2024. OPEC+ is looking to push oil prices higher.

"Saudi Arabia has a history of delivering on its promised cuts. As such, we expect 1 million barrels a day to disappear from the market in July, doubling the effective OPEC+ reduction since October last year," said Helima Croft, an analyst at RBC Capital.

Brent oil price movements over the past 6 months.

Analysts say the move will tighten supply and help set a floor for oil prices at $70 a barrel. But Saudi Arabia’s production cuts won’t immediately push prices higher, as inventories will take time to decline.

“With Saudi Arabia looking to protect oil prices from falling too low, we believe the likelihood of supply shortages in oil markets later this year is rising. Brent could rise to $85 a barrel in the fourth quarter of 2023, even if demand in China weakens,” said Vivek Dhar, an analyst at Commonwealth Bank of Australia.

Analysts at Goldman Sachs also forecast oil prices at $95 a barrel in December 2023. ANZ said: "Investors will bet on higher prices, as they believe Saudi Arabia and OPEC+ will provide support if the market faces challenges." Their forecast for Brent crude oil prices by the end of this year is $100 a barrel.

However, this increase could also be limited in the short term, until signs of supply shortage in the physical market appear.

In October 2022, OPEC+ announced a production cut of 2 million barrels per day. In April 2023, countries suddenly announced a voluntary cut of another 1.6 million barrels, starting in May. However, last month, WTI crude prices fell 11%, while Brent crude lost 8.8% as concerns about demand, especially from China, weighed on consumption prospects.

Ha Thu (according to Reuters)

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