Oil prices rose following OPEC kingpin Saudi Arabia’s decision to cut production by another million barrels per day.
On Sunday, the Organization of the Petroleum Exporting Countries and its partners (known as OPEC+) made no changes to its planned oil production cuts for the rest of the year. However, the world’s top oil exporter Saudi Arabia announced further voluntary output cuts which will be implemented from July.
The kingdom’s output will decline to 9 million barrels per day from around 10 million barrels in May, Saudi’s energy ministry said in a statement.
Both benchmarks were more than 2% higher on Monday.
International benchmark Brent crude futures traded at $77.89 a barrel at 9:50 a.m. London time, up 2.3%, while U.S. West Texas Intermediate futures stood at $73.50, over 2.4% higher.
OPEC+ pumps approximately 40% of the world’s crude and policy decisions can have a significant impact on prices.
On April 3, several producers of the oil cartel had revealed a combined 1.66 million barrels per day of production declines until the end of this year. And many market watchers, including analysts at Goldman Sachs, had expected the alliance to keep output unchanged this time around.
“The market did not widely expect the Saudi decision to cut production by 1 million barrels per day unilaterally,” the president of analysis firm Rapidan Energy, Bob McNally, told CNBC in an e-mail following the decision.
“It once again demonstrated that Saudi Arabia is willing to act unilaterally to stabilize oil prices,” McNally said, citing the example of January 2021 when the oil titan unilaterally cut by production by 1 million barrels per day.
“We see large global deficits materializing in the second half of 2023 and crude prices exceeding $100 next year,” he added.
Similarly, Kang Wu, head of global demand and Asia Analytics at S&P Global Commodity Insights, estimates that the significant rise of global oil demand in the Northern Hemisphere’s summer season will lead to an oil inventory draw and “support higher oil prices” over the coming months.
RBC Capital Markets’ Managing Director Helima Croft noted that while some market participants will focus on the fact that Saudi Arabia slashed its output independently, its actions lends to the integrity of the cuts.
“The fact that [Saudi Arabia] is willing to shoulder it alone adds to the credibility of the cut and signals real barrels coming off the market,” Croft wrote in a research report. However, others have not viewed the kingdom’s move with that much optimism.
This weekend marked an “ultimate failure of the Saudis” to marshal together all the OPEC+ members to undertake “what was required to bring better prices into the market,” said Ed Morse, Citi’s global head of commodities research and managing director.
Morse told CNBC’s “Squawk Box Asia” Monday that it’s still “an extremely weak” oil market in part due to disappointing demand in the three largest consuming regions: China, the European Union and the United States.
“We have a potential for supply to be a lot bigger than where demand growth is going,” he said, citing the potential of a recession on the horizon. “There is no guarantee that [oil prices] won’t go below $70,” he said.
Commonwealth Bank of Australia is of the view that Saudi Arabia will extend July’s production cuts if Brent futures remain in the $70 to $75 per barrel range, or even drop below that. “We think Saudi Arabia will look to deepen production cuts if Brent futures sustainably drop below $US70/bbl,” CBA’s Vivek Dhar wrote in a research note Monday.
— CNBC’s Sam Meredith contributed to this report.