OPEC+ Extends Deal into 2024, Saudi Arabia Commits to Major Oil Cuts in July

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Summary

In a move aimed at bolstering the sluggish oil prices, Saudi Arabia is set to implement a significant reduction in its output during the month of July, in addition to the broader OPEC+ agreement to curb supply until 2024.

According to the Kingdom’s energy ministry, Saudi Arabia will witness a substantial drop in production levels, with output expected to plummet to 9 million barrels per day (bpd) in July, representing the largest cut in years, compared to the approximately 10 million bpd recorded in May.

During a news conference, Saudi Energy Minister Prince Abdulaziz described this move as a “Saudi lollipop” and emphasized the strategic intention to add an element of suspense, preventing any attempts at predicting their actions. He further emphasized the urgent need for stabilizing the market, stating, “This market needs stabilisation”.

With this latest development, Saudi Arabia aims to inject vitality into the oil market, providing a glimmer of hope for a potential upward trajectory in prices. The kingdom’s commitment to reducing output underscores its determination to actively contribute to the stabilization of global oil markets, as it seeks to navigate the complexities of the ever-changing energy landscape.

OPEC+ consists of the Organization of the Petroleum Exporting Countries and its allies, with Russia taking a prominent role. This alliance collectively accounts for approximately 40% of global crude oil production, giving it substantial influence over oil prices.

In April, a surprising move to reduce supply had an immediate effect on the international benchmark Brent crude, pushing prices up by approximately $9. However, since then, prices have faced downward pressure due to apprehensions surrounding the fragility of the global economy and its implications for oil demand. At the end of the trading week, on Friday, Brent crude settled at $76 per barrel.

Among the members of OPEC+, Saudi Arabia holds a unique position with its significant spare capacity and ample storage capabilities. This advantage allows the country to swiftly adjust its oil output levels, both reducing and increasing production as needed.

This flexibility was demonstrated during the initial stages of the pandemic in 2020 when global oil markets faced a surplus of supply. Saudi Arabia, along with other producers in the alliance, promptly implemented historic production cuts to stabilize the market and address the oversupply situation. The kingdom’s ability to respond rapidly played a crucial role in mitigating the impact of the crisis on oil prices and market stability.

EXTENSION TO END OF 2024

As part of its efforts to regulate global oil supply and stabilize prices, OPEC+ has implemented production cuts totaling 3.66 million barrels per day (bpd). This reduction in output represents approximately 3.6% of global demand.

The agreed cuts consist of two components. The first component is a reduction of 2 million bpd that was agreed upon last year. The second component involves voluntary cuts of 1.66 million bpd, which were agreed upon in April. By implementing these measures, OPEC+ aims to balance supply and demand dynamics in the oil market, with the ultimate goal of supporting price stability and ensuring a sustainable global energy landscape.

The cuts, initially set to expire by the end of 2023, have been extended until the end of 2024, as agreed in a recent OPEC+ meeting. Western nations have accused OPEC of manipulating oil prices and undermining the global economy since Russia’s invasion of Ukraine in February of the previous year. Additionally, there have been allegations of OPEC aligning with Russia.

According to insiders within OPEC, the actions taken by Western nations, such as extensive money-printing over the past decade, have resulted in inflation and compelled oil-producing countries to take measures to safeguard the value of their primary export.

Analysts interpret the recent decision by OPEC+ as a strong indication that the group is committed to supporting oil prices and deterring speculative activities.

Amrita Sen, co-founder of the Energy Aspects think-tank, remarked that the OPEC+ decision serves as a clear message to the market, demonstrating the group’s willingness to establish and defend a minimum price level.

Gary Ross, founder of Black Gold Investors and an experienced observer of OPEC, remarked that the Saudis have followed through on their warnings to speculators, indicating their desire for higher oil prices.

With the market closed on Sunday, UBS analyst Giovanni Staunovo predicted a strong start when trading resumes on Monday.

In addition to extending the existing OPEC+ cuts of 3.66 million bpd, the group also agreed to further reduce production targets from January 2024 by 1.4 million bpd, bringing the combined targets to 40.46 million bpd.

However, it should be noted that some of these reductions will not have a significant impact as the group adjusted the targets for Russia, Nigeria, and Angola to align with their current production levels.

In contrast, the United Arab Emirates was granted permission to raise its output targets by approximately 0.2 million bpd to reach 3.22 million bpd.

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