Oil rose more than $1 a barrel on Monday after the biggest crude exporter, Saudi Arabia, plans to cut production by an additional 1 million barrels a day from July in response to macroeconomic headwinds weighing on markets.
Brent crude futures rose $1.72, or 2.3%, to $77.85 a barrel at 0900 GMT after hitting session highs of $78.73. West Texas Intermediate (WTI) crude rose $1.72, or 2.4%, to $73.46 after hitting its high of $75.06.
Both contracts gained more than 2% on Friday after the Saudi energy ministry said the kingdom’s output will fall from around 10 million bpd in May to 9 million bpd in July. It is the outage is Saudi Arabia’s largest in recent years.
The voluntary cut comes on top of a broader agreement to limit supply to 2024 as the Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, try to boost fluctuating oil prices.
OPEC+ pumps about 40% of the world’s crude oil and has lowered its production target to a total of 3.66 million barrels per day, reaching 3.6% of global demand.
The Saudis are more willing than most other members to ensure that oil prices are above $80 a barrel, which is necessary to balance their fiscal budget for the year. They will continue to do whatever it takes to keep oil prices high and take calculated preventative steps to ensure that macro concerns that have the potential to affect demand are dispelled.
The Saudi additional cut will likely deepen the market gap by more than 3 million bpd in July, which will push prices higher in the coming weeks.
Analysts estimate that the meeting provided “moderately bullish” for oil markets and could raise Brent prices by $1 to $6 a barrel for December 2023, depending on how long Saudi Arabia will maintain production of 9 million bpd over the next six months.
The immediate market impact of this cut in Saudi Arabia is likely to be less, as oil stocks take time to withdraw and the market likely puts a meaningful possibility of a discount today.
However, many of the OPEC+ cuts will have little real impact, as lower targets for Russia, Nigeria, and Angola align them with actual production levels.
In contrast, the United Arab Emirates (UAE) was allowed to raise its production targets by 200,000 barrels per day to 3.22 million barrels per day to reflect greater production capacity.