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How will extra Saudi oil output cut impact supply, prices?

Global crude markets are bracing for tighter supply

Global crude markets are bracing for tighter supply conditions and price hike as the one million barrel per day of extra output cut by Saudi Arabia takes effect this month.

The additional Saudi cut is likely to deepen the market deficit to more than three million bpd in July, which could push prices higher in the coming week, according to consultancy Rystad Energy.

Goldman Sachs analysts said the output deal was moderately bullish for oil markets and could boost December 2023 Brent prices by between $1 and $6 a barrel depending on how long Saudi Arabia maintains output at 9.0 million bpd. “The immediate market impact of this Saudi cut is likely lower, as drawing inventories takes time, and the market likely already put some meaningful probability on a cut today,” the bank’s analysts added.

Benchmark US crude oil for August delivery rose 78 cents to $70.64 a barrel Friday. Brent crude for August delivery rose 56 cents to $74.90 a barrel.

The extra Saudi cut comes as oil and gas drilling in the US shale patch is slowing down, which analysts fear would lead to supply shrinkage, pushing prices higher. An analyst said when drilling activity tightens, it is reasonable to expect tighter supply as well, which should affect prices in a positive way. However, this is contingent on demand being weak as well, which makes the situation more complicated than usual. Others remain cautious as they watch where demand is going, suspecting it will remain weak, keeping prices where they are.

Chief operating officer of EOG Resources, Lloyd Helms, said at a recent industry event hosted by JP Morgan that the market is a short term away from seeing further tightening. “We are more constructive on where oil prices could go.”

Saudi Arabia’s production cut of 1.0 million barrels per day planned for July and the similar cut in May have failed to lift oil prices, is signalling weak worldwide recessionary demand. The expected US growth of around 1.2 per cent this year signals slow domestic demand on top of an expected daily domestic production increase of about 600,000 barrels at year end to 12.75 million barrels per day, market pundits point out.

However, some analysts said the fundamentals are constructive for oil prices. Central banks are the main player in how inflation and interest rates are moderating.

The International Energy Agency has predicted that global oil demand growth would trickle nearly to a halt in the coming years and peak this decade with Chinese consumption set to slow down after an initial pent-up recovery. In its latest medium-term market report, the agency forecasts that global oil demand under current market and policy conditions will rise by 6.0 per cent from 2022 to reach 105.7 million barrels per day in 2028 on the back of the petrochemical and aviation sectors. Annual demand growth, however, will thin down from 2.4 million barrels per day this year to 400,000 barrels per day in 2028.

“The downturn in advanced economies renders the global outlook even more dependent on China’s post-Covid pandemic reopening being able to maintain its early momentum, which should eventually lift global trade and manufacturing,” the agency said, while stressing Beijing’s “pent-up” consumption will peak mid-2023 after a 1.5 million-barrels-per-day rebound but lose momentum to just an average 290,000 barrels per day year-on-year from 2024 to 2028.

Opec oil output has fallen only slightly in June as increases in Iraq and Nigeria limited the impact of cutbacks by others, despite a wider Opec+ deal and voluntary cuts by several members to support the market, a Reuters survey found on Friday.

The Organization of the Petroleum Exporting Countries has pumped 28.18 million barrels per day (bpd) this month, the survey found, down 50,000 bpd from May's revised figure. In May, output dropped by 240,000 bpd as the latest cut took effect.

The survey suggests little further progress by Opec in limiting supply ahead of a further voluntary reduction by Saudi Arabia which takes effect in July, as part of the producers' latest agreement made in June to support the market.