Saudi Arabia’s Major Production Cut Prompts Rise in Global Oil Prices

Written on June 07, 2023

On Monday, oil prices increased as Saudi Arabia, the world’s top exporter, announced plans to reduce production by an additional 1 million barrels per day (bpd) starting in July in response to macroeconomic factors dampening the market. This led to Brent crude futures settling at $76.71 a barrel and U.S. West Texas Intermediate crude reaching $72.15.

This voluntary cut, the largest Saudi Arabia has made in recent years, is part of a broader OPEC+ deal to limit supply until 2024 in an attempt to rejuvenate struggling oil prices. The OPEC+ group, responsible for about 40% of global crude production, has reduced its output goal by 3.66 million bpd, equivalent to 3.6% of worldwide demand.

However, market reaction was relatively subdued following a previous OPEC+ cut that failed to sustain higher prices. Rystad Energy, a consultancy, projected that the additional Saudi reduction could cause a market deficit exceeding 3 million bpd in July, potentially pushing prices upwards. Goldman Sachs suggested this could have a “moderately bullish” effect on oil markets and increase Brent prices by up to $6 a barrel by December 2023, depending on Saudi Arabia’s production maintenance.

Saudi Arabia has also raised its flagship crude Arab Light prices to Asian buyers to a six-month peak, following its output reduction promise. Meanwhile, other OPEC+ output reductions are expected to have minimal impact, as they simply align with actual production levels for countries like Russia, Nigeria, and Angola. In contrast, the United Arab Emirates (UAE) has been permitted to boost its output targets by 200,000 bpd due to its larger production capacity.

William Lemanske