A series of oil production cuts by Saudi Arabia since last fall may finally have an impact on prices. Markets largely ignored those moves, focusing instead on the shaky global economy, but this week the price of international benchmark Brent crude rose above $80 a barrel for the first time since late April.
In a report published on Thursday, the International Energy Agency, a Paris-based watchdog group, said production cuts starting in July could lead to a sharp reduction in global oil supplies, potentially pushing up prices and hurting consumers.
“After a period of relative calm, we expect some renewed volatility and upward pressure on prices in the coming months,” said Toril Bossoni, head of the oil markets division at the International Energy Agency.
A sustained rise in prices would be a major victory for Saudi Oil Minister Prince Abdulaziz bin Salman, who chairs the oil producer group known as OPEC Plus. He has waged a campaign to convince traders that Saudi Arabia and other oil producers will do whatever production cuts are needed to keep the market in balance.
In early July, Saudi Arabia said it would extend by another month to August the one million barrel per day cut it first announced in June. Notably, Russia also said that it will remove 500,000 barrels of oil per day from the market in August.
Analysts said Saudi Arabia wanted relatively high prices of $90 a barrel to finance an ambitious development program led by Crown Prince Mohammed bin Salman, the oil minister’s half-brother.
Until recently, markets were ignoring Saudi’s moves. Traders are worried about an economic slowdown, especially in China, which could reduce oil demand, as well as tensions between Riyadh and Moscow, which could lead to a battle for market share, as in 2014 and 2020 Oil prices had declined.
“There is too much negativity, a variety of negativity, that is holding everything hostage,” Prince Abdulaziz told a conference of the Organization of the Petroleum Exporting Countries at Vienna’s grand Hofburg Palace on July 5.
Nevertheless, the market may start trending in favor of OPEC.
“With Brent reaching $80 this week, I think people are going to re-evaluate their skepticism about the Saudi strategy,” said Helima Croft, head of global commodities at investment bank RBC.
A lot depends on the economic outlook. Oil prices may move higher if concerns over inflation and global growth ease.
Bob McNealy said, “I expect crude prices to rebound in the second half of this year due to strong supply cuts by OPEC+ producers, especially Saudi Arabia, along with a solid recovery in demand in China, India, the US and elsewhere.” Prices will skyrocket.” Chairman of Rapidan Energy Group, a research firm.
There are indications that Russia is cooperating with the Saudi-led cuts. The International Energy Agency said Russian oil exports fell nearly 8 percent in June from a month earlier. The agency estimates that Moscow’s revenue from these sales fell nearly 50 percent from a year earlier, to $11.8 billion.
Russian seaborne exports fell again in July to their lowest level this year, according to Viktor Katona, analyst at Kepler, a company that tracks these shipments.
Other factors may limit any significant increase in prices. For the first time this year, the International Energy Agency cut its forecast for oil demand growth in 2023 by 220,000 barrels per day to 2.2 million, mainly due to slower than expected growth in China.
While global oil demand is still expected to reach a record high of more than 102 million barrels per day in 2023, the agency projects that growth will halve in 2024, as electric vehicles help curb oil consumption .
At the same time, supply from countries outside OPEC including the United States, Brazil and Guyana has continued to rise, offsetting at least some of the impact of the group’s cuts.
OPEC also remains a source of potential additional oil. The International Energy Agency estimates that the new cuts will bring Saudi Arabia’s output to just nine million barrels per day, the lowest in two years, and put it behind Russia as OPEC Plus’ top producer. Analysts said the Saudis want to bring that production back up as quickly as possible.