Saudi Arabia has announced significant oil production cuts for July and an extension of the OPEC+ deal until 2024. The country plans to reduce production by approximately 1 million barrels per day (bpd) in July, setting the target output at 9 million bpd. This reduction is in addition to the ongoing cuts of at least 3.66 million bpd implemented by OPEC+ since October 2022. The group also agreed to lower overall production targets by 1.4 million bpd, effective from January 2024. The aim of these measures is to boost crude prices and protect the value of Saudi Arabia's primary export.
The announcement led to a surge in oil prices, with Brent oil futures rising by 1.7% and West Texas Intermediate crude futures increasing by 2%. However, both contracts still reflect a year-to-date decline of 6% to 8%. The decision to implement the production cuts comes at a time when concerns about slowing economic growth and weakened demand have negatively impacted oil prices. The uncertainty surrounding a potential U.S. debt default and China's underwhelming economic performance has raised doubts about demand recovery in 2023.
Despite these challenges, the tighter oil markets expected in the latter half of the year are likely to provide support for prices. China, the world's largest oil importer, has shown uneven progress in its recovery, suggesting limited demand later in the year. Additionally, economic powerhouses like the eurozone and the United States are experiencing a slowdown in manufacturing activity, which is expected to hinder economic growth. Against the backdrop of anticipated higher U.S. interest rates, Saudi Arabia's commitment to significant oil cuts in July, along with the extension of the OPEC+ agreement, is poised to influence oil prices and stabilize the market.
