International oil prices are on the rise, with Saudi Arabia and its "ally" Russia possibly continuing their crude oil production cuts.
On September 5, Saudi media reported that in an effort to "stabilize oil prices," Saudi Arabia would extend its daily production cut of 1 million barrels for another three months. This move keeps Saudi's daily production around 9 million barrels, the lowest in years.
Additionally, Russia's Deputy Prime Minister, Alexander Novak, stated on Tuesday that Russia would extend its voluntary production cut of 300,000 barrels per day until the end of the year to "maintain stability and balance in the oil market."
Given that most traders and analysts had previously anticipated Saudi Arabia's daily production cut of 1 million barrels to last at least until October, Saudi's decision exceeded market expectations, causing a short-term surge in oil prices.
Within five minutes, WTI crude oil rose by $0.84 per barrel, trading at $87.01 per barrel. Meanwhile, Brent crude increased by $0.78 per barrel, reaching $90.09 per barrel, marking its first time touching $90 since last November.
Last Wednesday, data from the U.S. Energy Information Administration (EIA) revealed that for the week ending August 25th, U.S. crude oil inventories plummeted by 10.58 million barrels, the lowest since 2022. The market had anticipated a decrease of 1.5955 million barrels, compared to the previous week's reduction of 6.134 million barrels.
Currently, the three major global energy reports are bullish on oil prices, citing OPEC+ production cuts and robust demand. On August 8th, the EIA released its monthly short-term energy outlook, projecting Brent crude prices to average $86 per barrel in the second half of 2023, an increase of about $7 from its July forecast.
On August 11th, the International Energy Agency (IEA) believed that considering the supply tightening due to OPEC+ production cuts, there's still room for oil prices to rise. OPEC remains optimistic about oil demand for the next two years.
Wall Street Journal had previously reported that most traders and analysts expected Saudi Arabia's daily production cut of 1 million barrels to last at least until October to continue boosting oil prices. Additionally, some representatives from OPEC and its allies had similar predictions in private.
Insiders noted that there's a lot of macroeconomic uncertainty currently. If Saudi Arabia relaxes its production cut policy too soon, speculative short-sellers might make a comeback.
In an OPEC+ meeting in early June, Saudi Arabia unexpectedly announced an additional daily production cut of 1 million barrels for July, its most significant reduction in years, bringing its production down to 9 million barrels per day, the lowest since June 2021. Saudi Arabia is the only OPEC+ member with ample spare capacity and storage capabilities, allowing it to easily increase or decrease production.
Saudi Arabia began its additional voluntary daily production cut of 1 million barrels in July and has since been assessing monthly whether to extend this plan. Typically, Saudi Arabia announces its decision to extend additional production cuts in the first week of each month. OPEC+ will hold a meeting at the end of November to review its production policy for 2024.
Saudi Crown Prince and Energy Minister Abdulaziz bin Salman had previously stated that Saudi Arabia would take all necessary actions for the stability of the oil market.
"This is Saudi's 'lollipop.' We want to ice the cake. We always want to add suspense. We don't want people trying to predict what we're going to do. This market needs stability," he said.
Market analysts believe that Saudi Arabia, at the cost of sacrificing its market share, is aggressively cutting production to boost oil prices. This is primarily because Saudi Arabia needs an oil price of around $80 per barrel to maintain its vast budget and fund its economic transformation projects.
However, supporting oil prices by reducing production means that the actual price Saudi Arabia needs might be higher than $80. A drop in oil prices would pose a risk to Saudi Arabia, whose foreign exchange reserves have already slid to their lowest levels since 2009.
The International Monetary Fund had previously significantly lowered its economic growth forecast for Saudi Arabia because its sales volume is decreasing. However, analysts suggest that this seems to be a "price Saudi is willing to pay." Saudi Arabia might need an oil price close to $100 per barrel to finance the ambitious spending projects of Crown Prince Abdulaziz bin Salman.
Bjarne Schieldrop, Chief Commodity Analyst at SEB AB, commented, "There's no sign that Saudi Arabia will abandon its current price-over-volume strategy. Price over volume is the name of the game."
Russia's Production Cut Reduction
Notably, Russia's recent production cut measures have actually reduced the extent of the cuts.
As the world's second-largest oil exporter, outside of the existing OPEC+ production cut measures, Russia has been consistently reducing its production and exports alongside Saudi Arabia, proving to be a loyal "ally" in Saudi's oil price regulation efforts.
Wall Street Journal had previously reported that in February, Russia committed to reducing its daily oil production by 500,000 barrels starting in March, maintaining this cut until the end of 2024.
Thus, Russia's recent announcement of a 300,000 barrel per day reduction for September effectively reduces the extent of the cut.
Last week, Novak stated that Russia and its OPEC+ partners had reached an agreement to further reduce oil exports.
Now, Russia will review its voluntary oil production cut decision monthly, considering the possibility of deepening the cuts or increasing production based on the global market situation.
