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Saudi extends voluntary oil cut until end of 2023

Saudi extends oil cut Reuters/Maxim Shemetov
The three month extension of the oil production cut by Saudi Arabia was unexpected

Saudi Arabia will extend its voluntary oil production cut of one million barrels per day (bpd) until the end of 2023, the state-run Saudi Press Agency reported, citing an official source in the energy ministry.

The cut, which took effect from July, will see output for October, November, and December capped at nearly nine million bpd.

The decision will be reviewed monthly to consider “deepening the cut or increasing production”.

The source stated that the output reduction is in addition to the voluntary cut previously announced by the kingdom in April 2023, which extends until the end of December 2024.

The additional voluntary cut intends to reinforce the precautionary efforts made by Opec+ to support the stability of oil markets.

Matt Stanley, a Dubai-based energy specialist at analytics company Kpler, welcomed the move to maintain a balanced market.

“Anything but maintaining what they’re doing right now would have really caused some spike in volatility,” he said.

Stanley believed the higher oil price as a result of the production cut will not damage the global economy. “The oil prices have been relatively steady for the last year. They are broadly similar to where they were 12 months ago,” he said.

Separately, Russia extended its voluntary decision to reduce its oil exports by 300,000 bpd to the end of this year, deputy prime minister Alexander Novak said in a statement on Tuesday.

National interests

Bill Farren-Price, senior researcher at Oxford Institute For Energy Studies, said the announcement demonstrated that the kingdom was pursuing its national interests ahead of inflationary concerns in consumer countries.

“Saudi Arabia would be very content with prices around $100 and that probably looks like where we’re heading,” he said.

The kingdom needs higher oil prices to fund its portfolio of giga-projects. The total value of real estate and infrastructure schemes launched, but yet to be delivered, since the launch of the Vision 2030 plan in 2016 has crossed the $1.25 trillion, according to data published this week by global real estate consultancy Knight Frank.

The International Monetary Fund in May forecasted that Saudi Arabia’s break-even oil price was $80.9.

“The whole economic strategy is based on huge investment levels into the non-oil economy and they need to get that money from somewhere. The strategy makes perfect sense and I expect it to continue like this,” Farren-Price added.

Higher prices

Investors had expected Saudi Arabia and Russia to extend voluntary cuts into October, but the three-month extension was unexpected.

“These bullish moves significantly tighten the global oil market and can only result in one thing: higher oil prices worldwide,” Jorge Leon, senior vice president at consultancy Rystad Energy, said in a note.

One veteran Opec watcher, Black Gold Investors CEO Gary Ross, told an energy industry conference in Singapore this week that oil prices in the range of $90-$100 per barrel may lead Saudi Arabia to taper its supply cuts.

Oil prices rose in early Asian trade after rising over 1 percent in the previous session, as markets worried about a supply shortage.

Brent crude futures rose by 14 cents to $90.18 a barrel. US West Texas Intermediate crude (WTI) futures gained 12 cents at $86.81 a barrel.