Oil expenses increased following Saudi Arabia's promises of additional voluntary show scratches

June 7, 2023: Oil prices increased after OPEC kingpin Saudi Arabia’s decision to cut production by another million barrels daily.

On Sunday, the Organization of Petroleum Transferring Countries and its partners (OPEC+) made no modifications to its planned oil production cuts for the rest of the year. However, the world’s top oil exporter Saudi Arabia told additional voluntary output amounts, which will be implemented in July.

The kingdom’s output will downfall to 9 million barrels per day from around 10 million casks in May, Saudi’s energy ministry said in a statement.

Both benchmarks were trading higher on Monday.

International benchmark Brent crude futures traded at $77.42 a barrel, up 1.7%, while U.S. West Texas Intermediate futures stood at $72.87, over 1.5% higher.

OPEC+ pumps approximately 40% of the world’s crude, and policy decisions can significantly impact prices.

“The market did not widely expect the Saudi decision to slash production by 1 million barrels per day unilaterally,” the president of analysis firm Rapidan Energy, Bob McNally, told in an email.

“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 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 lend 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.