Oil costs rise after Saudi Arabia pledged manufacturing cuts

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Oil prices soared after OPEC chief Saudi Arabia decided to cut production by another million barrels a day.

On Sunday, the Organization of the Petroleum Exporting Countries and its partners (known as OPEC+) made no changes to their planned oil production cuts for the remainder of the year. However, the world’s largest oil exporter Saudi Arabia announced further voluntary production cuts, which will be implemented from July.

The kingdom’s production will fall to 9 million barrels a day from around 10 million barrels in May, the Saudi Energy Ministry said in a statement.

Global benchmark Brent futures rose 2.4% to $78.00 a barrel in early Asian trade Monday, while U.S. West Texas Intermediate futures rose 2.5% to $73.53 a barrel . OPEC+ produces about 40% of the world’s crude oil, and production decisions can have a significant impact on prices.

On April 3, several producers in the oil cartel announced a total drop in production of 1.66 million barrels per day by the end of the year. And many market watchers, including analysts at Goldman Sachs, had expected Allianz to leave production unchanged this time around.

“The market did not generally anticipate the Saudi decision to unilaterally cut production by 1 million barrels per day,” analytics firm Rapidan Energy president Bob McNally told CNBC in an email after the decision.

“It has shown once again that Saudi Arabia is willing to act unilaterally to stabilize oil prices,” McNally said, citing the example of January 2021 when the oil giant unilaterally cut production by 1 million barrels a day.

“We see large global deficits in the second half of 2023 and crude oil prices surpassing $100 next year,” he added.

Similarly, Kang Wu, head of global demand and Asia analytics at S&P Global Commodity Insight, estimates that the sharp increase in global oil demand during the summer season will lead to a decline in northern hemisphere oil supplies and will “support higher oil prices” in the coming months .

“Ultimate Failure”

This weekend was an “ultimate failure by the Saudis” to rally all OPEC+ members to “do what is necessary to bring better prices to market,” said Ed Morse, global head of commodity research and chief executive officer of Citi.

Morse told CNBC’s Squawk Box Asia on Monday that it was still an “extremely weak” oil market, due in part to disappointing demand in the top three consuming regions: China, the European Union and the United States .

“We have the potential for supply to be much greater than demand growth,” he said, citing the potential for a recession on the horizon. “There is no guarantee of that [oil prices] will not go below $70,” he said.

The Commonwealth Bank of Australia believes Saudi Arabia will extend July’s production cuts if Brent futures remain in or even fall below the $70-$75 a barrel range. “We believe that if Brent futures sustainably fall below $70 a barrel, Saudi Arabia will look to exacerbate production cuts,” the CBA’s Vivek Dhar wrote in a research note on Monday.