What analysts are saying about Saudi Arabia's latest oil output cut

The 23-member Opec+ alliance of oil producers has extended its output cuts until the end of 2024, with top crude exporter Saudi Arabia announcing a further voluntary cut as concerns about economic growth weigh on the outlook for fuel demand. The kingdom will make an output cut of a million barrels per day in July, which could be extended if required. The group has total production curbs of 3.66 million bpd, or about 3.7 per cent of global demand, in place, including a 2 million bpd reduction agreed on last year and voluntary cuts of 1.66 million bpd announced in April. These cuts, which were initially set to expire by the end of this year, will now remain in effect until December 2024. Russia also said it would extend its voluntary output cut of 500,000 bpd until the end of next year. Separately, Opec+ said on Sunday that it had set a new production target of 40.46 million bpd for 2024. The decision was taken “in light of the continued commitment … to achieve and sustain a stable oil market, and to provide long-term guidance for the market, and in line with the successful approach of being precautious, proactive and pre-emptive”, the alliance of crude producers said. Oil prices rallied on Monday after the group’s decision. Brent, the benchmark for two thirds of the world’s oil, was trading 2.27 per cent higher at $77.86 a barrel at 12.10pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was up 2.38 per cent at $73.45 a barrel. Brent is still down about 9 per cent since the beginning of the year amid concerns of weak economic growth in the US and China – the two biggest oil-consuming nations. Here is what analysts are saying about Opec+'s decision – and its implications. The Norway-based consultancy said the move would boost oil prices in the short term, with the long-term pricing trend depending on macroeconomic factors. “The pure possibility of the Saudi production cut extending beyond July will limit downside price pressure for the rest of 2023,” said Jorge Leon, senior vice president at Rystad. Japan's largest lender MUFG Bank said the Opec+ decision was only “mildly bullish” and as a result of Saudi Arabia’s “fortitude” to not give speculators free rein to force an acute leg lower in prices. “Such support for oil prices is partly offset by both the market having priced in a high probability of Opec+ cuts heading into the weekend, as well as bearish downside prices risks stemming from the likely, ongoing higher-than expected supply from sanctioned countries,” said Ehsan Khoman, head of commodities, ESG and emerging markets at MUFG. “Our conviction is that the group’s greater-than-historical pricing power offers the space for it to deliver additional cuts in the second half of the year should Brent oil prices remain persistently below our Opec+ put of $75 a barrel.” MUFG said Saudi Arabia’s unilateral cut of a million bpd and significantly larger supply deficits would be a key catalyst for higher oil prices over the summer. The lender expects Brent crude to average $92 a barrel in the second half of this year. Emirates NBD estimates that the announced cuts — both the required production targets for 2024 as well as the voluntary adjustments — will amount to a drop in Opec+ production of about 2.5 per cent next year, compared with 2023 levels. Opec+ output targets for 2024 also show a substantial revision to production baseline levels and all members of the alliance are expected to agree on a new assessment in June next year. “The revision to baselines was likely a necessity for Opec+ to present a decision with a unified voice as several countries who have made heavy investment into upstream projects had been forced to idle much of their overall capacity,” Emirates NBD economists said. “Because of the extension of the voluntary cuts, overall Opec+ production targets are due to be lower in 2024, from 2023 levels, as the producers’ alliance wants to maintain a ‘precautious, proactive, and pre-emptive’ approach to market management,” the UAE lender said. “The length of the arrangement is a main takeaway of the meeting, given producers’ are pledging target levels for the H2 [second half of] 2024 when near-term oil market fundamentals look to be in flux.” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said Saudi Arabia would continue to do the heavy lifting in terms of production cuts, “hoping that its efforts will reverse the falling price trend in oil markets and boost prices”. “The short-term price risks remain tilted to the upside … but any price rally continues to be seen as [an] interesting top selling opportunity by oil traders as [China's] post-Covid reopening doesn’t gather the pace investors expected”. Naeem Aslam, chief investment officer at Zaye Capital Markets, said oil prices were very much in focus today, “and bulls are certainly celebrating the news from Opec, which played another proactive role in the market”. “Saudi Arabia delivered on its promise that it was determined to keep prices stable. Only a few weeks ago, the Saudi Oil Minister warned speculators that they needed to play very carefully if they believed that they could get away with shorting oil prices,” Mr Aslam said. The kingdom will not allow another episode of a crash in oil prices, he said, adding that it had delivered on this on Sunday. Swiss wealth management bank Julius Baer said Saudi Arabia’s additional efforts are “somewhat of a surprise”, but are aligned with the country’s leadership role. “Saudi Arabia was quite outspoken in seeing the market biased by speculators in previous weeks. Oil market sentiment, indeed, looks rather bearish, to a large extent influenced by China’s loss of economic momentum,” said Norbert Rucker, head of economics and next-generation research at Julius Baer. “The seemingly lengthy and intense discussions point at the various opposing interests within the group. Some members could take compliance less seriously in the slipstream of Saudi Arabia’s leadership.” Politics will add to the volatility in oil prices but is not expected to change established trends meaningfully, he said. “These trends remain dominated by stagnant western world oil demand, growing shale production and maintained flows from Russia.”

What analysts are saying about Saudi Arabia's latest oil output cut

Brent and WTI, the world’s two leading crude futures contracts, were trading higher on Monday