Russia and Saudi Arabia advised further cuts to oil production to increase crude prices. These cuts come as global oil demand is dampened by a slowdown, especially in China.
Saudi Arabia will extend its voluntary production cut of 1 million barrels daily until the end of August. It was widely expected due to Brent crude oil prices remaining in the low-to-mid $70s per barrel over the past two months.
Despite the advice, Brent Crude Oil Futures closed a little lower on Monday. Due to the extended cut, Saudi Arabia will produce around 9 million barrels daily in July and August. This decision complements output curbs agreed upon by the members of the OPEC-plus alliance.
Extension of Saudi Arabia’s Oil Production
The extension of Saudi Arabia’s oil production cut comes during a challenging market environment. Oil prices have declined by a third over the past year, resulting from concerns about the global economy and conflicting Chinese economic data.
Market expectations suggest that Saudi Arabia may need to extend the voluntary cuts into September due to a divergence between market sentiment and fundamentals.
Saudi Arabia will soon release official selling prices for its crude in different buying regions globally.
These prices, which are typically released by the fifth day of each month, closely followed by neighboring producers, play a pivotal role in determining demand from various regions. Before the latest cuts, traders expected that prices for August-loading cargoes from Saudi Arabia would remain unchanged, which many already deemed relatively high.
Some traders anticipate a price increase if Saudi Arabia aims to tighten supplies.
The spread between two crude benchmarks, Brent and Dubai, has significantly decreased over the past month, meaning Brent-linked crude may be more attractive.
Russia Determined to Boost Crude Oil Production Prices
Russia, in a coordinated move with Saudi Arabia, has announced that it will cut its oil exports by 500,000 barrels per day in August. This step aims to ensure a balanced oil market.
Previously, Russia’s commitment was a voluntary production cut of 500,000 barrels per day until the end of this year.
Russia’s focus on reducing exports rather than production may indicate sensitivity to concerns from other producers about losing ground to discounted Russian crude in key export markets.
It is worth noting that Russia’s crude oil exports to non-FSU countries declined in June after reaching nearly 5 million barrels per day in May due to refinery maintenance work.
Russia’s determination to boost crude oil prices as Western sanctions have significantly impacted its budget revenues in response to its war in Ukraine.
Overall, the Saudi initiative and Russia’s support for the OPEC-plus supply management efforts will tighten the global oil market in the year’s second half.
Saudi Oil Cuts See Top Buyers Looking at Crude From Elsewhere
Saudi Arabia, Russia agree to keep a lid on supply in August
— Giovanni Staunovo🛢 (@staunovo) July 4, 2023
Asian Oil Refiners Preparing to Find Alternative Sources
Asian oil refiners, responsible for a third of global fuel consumption, are preparing to find alternative sources of crude if the latest supply cuts leave them deprived.
The two producer countries have extended and deepened the curbs into August. Combined with previous reductions and ongoing cuts by other OPEC+ nations, it will reduce 3 – 1 million barrels per day – approximately 3% of global consumption.
Traders in Asia believe alternative crude supply is abundant from non-OPEC+ producers, such as the US, West Africa, and the North Sea, that can be tapped into if the region is affected by the latest cuts.
On the other hand, it may result in losing market share in the fastest-growing demand market.
Thus far, the production cuts implemented by Saudi Arabia and its allies have not significantly impacted headline oil prices, which have remained around $70 to $80 per barrel for weeks.
However, grades similar to those pumped by Saudi Arabia have experienced more robust price rallies and even surpassed Brent last week.
Increasing Demand for West African Grades
There are indications of increasing Asian demand for West African grades. Refiners in South Korea, India, China, and Taiwan can select between Middle Eastern barrels and arbitrage cargoes. According to undisclosed traders, two South Korean refiners have recently purchased approximately 6 million barrels of US crude.
Traders involved in the market have reported that China’s refiners have already secured a significant number of Angolan cargoes, and state refiners in Indonesia and India have also purchased Nigerian cargoes for loading in August.
Arbitrage flows from the North Sea to Asia have resumed, indicating that transporting barrels over long distances is profitable.
In the North Sea, Johan Sverdrup is currently in high demand. The bid at a $1.70 per barrel premium to the benchmark Dated Brent in a pricing window run by S&P Global Commodities Insights (Platts).
Ship-tracking data shows that two supertankers are transporting North Sea’s Forties grade to China, with an estimated arrival next month.
Written by Janet Grace Ortigas
BENZINGA: Saudi Arabia, Russia Deepen Oil Supply Cuts — Defying US Calls: Reuters
Bloomberg: Saudi Oil Cuts See Buyers Looking at Crude From Elsewhere; by Sharon Cho and Sherry Su
CNN: Saudi Arabia and Russia curb oil supply again to try to boost prices; by Anna Cooban
Energy Intelligence: Saudi Arabia Extends Cuts, Russia to Curb Exports
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