RIYADH, SAUDI ARABIA — At the beginning of August, Saudi Arabia extended the voluntary oil production cut of one million barrels per day for an additional month, indicating the possibility of a new extension after that or an increase in this cut as part of an attempt to support crude prices.
At the same time, oil producers are facing a decline in prices and fluctuations in the market, reflecting the continuing repercussions resulting from the Russian military operation in Ukraine and the faltering economic recovery of China.
But how will Saudi Arabia’s decision to extend its oil cuts until November impact the oil market? And what are the effects on the Kingdom’s economy?
Saudi oil exports decline
Key Asian importers have favored cheaper Russian oil, causing Saudi Arabia’s crude oil shipments to fall for the third month in a row, reaching their lowest level since September 2021, according to information released by the Joint Organizations Data Initiative (JODI).
In June, the Kingdom’s total crude oil exports totaled 6.8 million barrels per day, down from 6.93 million barrels per day in May, or a decrease of around 1.8 percent.
Saudi Arabia's crude facts * Saudi Arabia extended its voluntary oil production cut of one million barrels per day for an additional month. * Saudi Arabia's crude oil shipments fell for the third consecutive month, reaching their lowest level since September 2021. * In June, Saudi Arabia's total crude oil exports were 6.8 million barrels per day, down 1.8% from May. * Saudi Arabia's crude oil production in June was 9.96 million barrels per day, with inventories increasing by 1.45 million barrels to 149.69 million barrels. * Saudi Arabia's petroleum product exports fell by 26,000 barrels to 1.35 million barrels per day in June. * After extending production cuts, Saudi Arabia raised September's prices for most of its crude oil exports to Asia. * Saudi Arabia is the world's second-largest crude oil producer, with an average daily production of 10.47 million barrels. * The impact of production cuts on Saudi Arabia's economy and GDP depends on future market developments and price shifts. * Higher oil prices may improve total revenue from oil exports even if production cuts are implemented. * Diversifying the economy away from oil could benefit Saudi Arabia's entire economy and support all sectors by reducing risks.
Saudi Arabia’s crude oil production in June did not change significantly from the previous month, recording 9.96 million barrels per day, while inventories increased by 1.45 million barrels, reaching 149.69 million barrels.
Saudi Arabia’s exports of petroleum products fell by 26,000 barrels from May to 1.35 million barrels per day in June.
Tanker data from trade sources last month showed India’s imports of Russian oil rose to a record high in June.
Government data showed that China’s crude oil imports from Russia rose to a record high in June, with refineries continuing to snap up Russian Espoo crude despite a shrinking discount against international benchmarks.
After announcing an extension of production cuts, Saudi Arabia raised September’s prices for most of the crude oil it exports to Asia.
Saudi Arabia is the second largest producer of crude oil in the world after the United States, with an average daily production of 10.47 million barrels in normal conditions, while Russia is in third place with an average daily production of 10 million barrels. Reducing production usually raises tensions with the United States, which is struggling to curb inflation, while Saudi Arabia seeks to achieve significant oil revenues to finance its ambitious development plans, the foremost of which is diversifying the Kingdom’s sources of income.
Cuts strengthen the oil market
“The Saudi decision to extend oil production cuts to include September could help lift the market in the coming weeks. Crude prices have been on an uptrend for some time now due to tighter supplies as OPEC+ oil producers deployed the necessary measures to prop up the market,” Denys Peleshok, Head of Asia at CPT Markets, told TRENDS in an interview.
“If Saudi Arabia, Russia, and other producers maintain or deepen their production cuts, the market could see more strength. However, concerns about demand levels could continue to weigh on the market with traders monitoring the economic recovery in China in particular,” he added.
Regarding the cuts’ impact on Saudi’s economy and GDP, Peleshok sees that it might present some risks for the Kingdom, considering its strong dependence on oil revenues.
The effect, however, will be contingent on future market developments and price shifts. Higher oil prices may improve total revenue from oil exports even if production cuts are implemented.
Given the current volatility in oil prices and the unknown demand levels, this method may be at risk if oil prices don’t increase as much as oil producers want them to.
Peleshok said, “Saudi Arabia’s position could change depending on the market behavior and price levels after November.”
“Strong demand and a positive global economic sentiment could justify phasing out production cuts. However, if China’s economic recovery remains weaker than expected and the market sees more downside risks, maintaining and extending production cuts could become an evident solution for Saudi Arabia and other major crude producers to limit oil price decreases,” he added.
Growing sectors
Without a doubt, the market has responded to production reduction by bidding up prices in anticipation of tighter supplies. In addition to OPEC’s efforts, this decision demonstrates producers’ willingness to step in and try to keep oil prices from falling too far.
As a result, the habits and expectations of market participants have been altered. However, the vitality of the demand side may also be connected to the efficacy of these policies. Production reduction may not be enough to sustain the market if demand declines further, according to Peleshok.
At the same time, diversifying the economy away from oil could benefit the entire economy and support all sectors by reducing risks.
Peleshok believes that “diversification could provide more stability to the stock market as non-oil sectors could become increasingly decoupled from the performance in oil markets.”
Furthermore, the stock market will be more attractive for local and international investors.
Global oil demand increases
Global oil demand rose to a record level thanks to strong consumption in China and elsewhere, which paves the way for higher prices, according to The International Energy Agency (IEA).
The average oil use around the world reached 103 million barrels per day for the first-time last June, and it may rise further in August, the agency added in its report.
Oil demand rose to record levels, supported by intense air travel in the summer, increased use of oil in electricity generation, and increased activity in the Chinese petrochemical sector. Meanwhile, inventories of crude oil and petroleum products recorded a sharp decline. The IEA expects that inventories will shrink further in the fall.
Despite the growing indications of a warming planet – evident during heat waves and wildfires this summer in the northern hemisphere – the agency’s data shows that the use of oil is stronger than ever. China will account for 70 percent of demand growth in 2023. At the same time, developed countries, which enjoy economic flexibility, have also contributed to the recent increase in demand for oil.
The IEA expects the impact of the energy transition to appear on the market in 2024. At that time, global demand growth is estimated to decline by approximately 50 percent to one million barrels per day, due to improved car efficiency and increased adoption of electric vehicles.
However, as this shift occurs, global market supply will shrink, leaving oil stocks in developed countries about 115 million barrels below their five-year average, according to the agency’s report. The IEA also predicted the depletion of 1.7 million barrels per day of global stocks in the second half of 2023.