Oil prices experienced a notable increase of over $1 per barrel on Monday, driven by an announcement from Saudi Arabia, the leading crude oil exporter.
The nation declared its intention to implement an additional cut of 1 million barrels per day (bpd) in production starting in July.
This decision is aimed at mitigating the adverse effects of macroeconomic challenges that have adversely impacted global markets.
As a result, Brent crude futures saw a rise of $1.72, equivalent to a 2.3% increase, reaching $77.85 per barrel as of 0900 GMT. During the trading session, the price reached a peak of $78.73.
Similarly, U.S. West Texas Intermediate crude experienced a climb of $1.72, or 2.4%, reaching $73.46 per barrel, with an intraday high of $75.06.
The surge in prices builds upon the momentum gained on Friday, when the Saudi energy ministry confirmed that the kingdom’s output would be reduced to 9 million bpd in July, down from approximately 10 million bpd in May. This reduction represents one of the largest output cuts by Saudi Arabia in recent years.
In addition to Saudi Arabia’s efforts, this voluntary production cut aligns with the broader agreement made by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia.
The agreement aims to limit oil supply until 2024, with the OPEC+ producer group striving to revive declining oil prices.
OPEC+ currently accounts for about 40% of global crude production and has collectively reduced its output target by a total of 3.66 million bpd, which corresponds to around 3.6% of the global demand for oil.
“Saudi remains keener than most other members in terms of ensuring oil prices above $80 per barrel, which is essential for balancing its own fiscal budget for the year,” said Suvro Sarkar, leader of the energy sector team at DBS Bank.
“Saudi will probably continue doing whatever it takes to keep oil prices elevated … and take calculated pre-emptive steps to ensure the macro concerns potentially affecting demand are negated.”
According to consultancy firm Rystad Energy, the supplementary production cut by Saudi Arabia is expected to further increase the market deficit to over 3 million bpd in July.
This anticipated deficit could potentially drive oil prices even higher in the upcoming weeks.
Goldman Sachs analysts expressed a “moderately bullish” outlook for oil markets following the announcement.
They suggested that if Saudi Arabia sustains its output at 9 million bpd for the next six months, it could potentially lead to a price increase of $1 to $6 per barrel for December 2023 Brent prices.
The precise impact would depend on the duration of Saudi Arabia’s production maintenance.
“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.
While several OPEC+ members are aligning their output targets with their actual production levels, it is believed that some of these reductions will have minimal real impact.
This is particularly the case for Russia, Nigeria, and Angola, as their lower targets now correspond more closely to their current production capacities.
In contrast, the United Arab Emirates (UAE) has been granted permission to increase its output targets by 200,000 bpd, bringing the new target to 3.22 million bpd.
This adjustment accounts for the UAE’s larger production capacity and reflects the country’s ability to produce at a higher level.
