Saudi Arabia and Russia have jointly announced an extension of their voluntary oil production cuts, propelling Brent crude prices to a 10-month peak. The Saudi Kingdom's initial production cut of one million barrels per day, initiated in July, will now persist until the conclusion of December 2023, as per the statement from the Kingdom's energy ministry. Russia will likewise uphold its export cut of 300,000 bpd for the same duration, as confirmed by Deputy Prime Minister Alexander Novak.
This development has witnessed Brent crude surging past the $90 per barrel mark for the first time since November, while West Texas Intermediate, the principal US futures contract, marked an ascent of 1.9 percent to reach $87.16.
Saudi Arabia, recognized as the world's foremost crude exporter, had initially unveiled its production cut strategy after a June meeting of the OPEC+ alliance, which includes Russia. Back in early August, when the cut's extension through September was disclosed, a caveat was issued, hinting at the possibility of a "deepened" reduction. However, the latest announcement has kept the cut at its existing level.
The energy ministry's statement emphasized that the decision would be reviewed on a monthly basis, presenting the option to either intensify the cut or augment production as required.
This unilateral move by Saudi Arabia followed a decision made by several OPEC+ members in April to voluntarily curtail production by over a million bpd. While this decision briefly bolstered prices, it failed to induce a lasting recovery. In October of the preceding year, OPEC+ had consented to slash output by two million barrels daily, an action that had irked the United States, which at the time accused Saudi Arabia of siding with Russia in the Ukraine conflict.
July marked the first month when the Saudi-exclusive cut came into effect, propelling oil prices past the $80 per barrel threshold – a level often deemed necessary for Riyadh to maintain fiscal equilibrium. However, the cumulative impact of production reductions could potentially elevate this threshold.
As of August, Brent crude was trading at $88 per barrel, according to Riyadh-based firm Jadwa Investment. The firm underscored that despite persistently dismal economic data from China dampening sentiment, market fundamentals are unequivocally tightening.
Justin Alexander, Director of the consultancy Khalij Economics, acknowledged the efficacy of the additional cuts in boosting prices, albeit at a cost to Saudi Arabia. These reductions amount to a 10 percent decrease in Saudi supply, in addition to the 10 percent cut agreed upon during the October and April OPEC+ meetings.
Saudi Arabia's daily production currently hovers around nine million bpd, notably lower than its reported daily capacity of 12 million bpd. Furthermore, in August, Saudi Aramco, the linchpin of the Saudi economy, reported profits of $30.08 billion for the second quarter of 2023 – a stark 38 percent decline from the previous year when prices had surged following Russia's invasion of Ukraine. This drop primarily stemmed from diminished crude oil prices and weakening refining and chemicals margins, according to the company.
Aramco's CEO, Amin Nasser, reassured that despite the recent cuts, the firm possesses sufficient supplies to meet customer demands. Nasser expressed optimism about the medium to long-term outlook, anticipating global demand to surge alongside a broader economic recovery, with a noteworthy uptick in demand from China, surpassing expectations.
Saudi Arabia, owning 90 percent of Aramco's shares, relies on its revenue to fuel Crown Prince Mohammed bin Salman's ambitious economic and social reform initiative, known as Vision 2030, which aims to steer the economy away from fossil fuels. Justin Alexander noted that the distribution of a new performance-linked dividend of $9.9 billion for the third quarter, with similar payments projected over six quarters, "will provide a temporary offset for the revenue lost as a result of the additional cuts."
