Oil rallies after Saudi Arabia pledges cuts and Opec+ extends deal into 2024

Kingdom will make an additional output cut of 1 million barrels per day in July

Opec's headquarters in Vienna. The Opec+ alliance set a new production target of 40.46 million barrels per day throughout 2024. AFP

Oil prices rallied on Monday after Saudi Arabia pledged more output cuts and the 23-member Opec+ alliance extended its production agreement into 2024.

Brent, the benchmark for two thirds of the world’s oil, was trading 1.69 per cent higher at $77.42 a barrel at 8.45pm UAE time on Monday. West Texas Intermediate, the gauge that tracks US crude, was up 1.58 per cent at $72.87 a barrel.

On Sunday, Opec+ members Saudi Arabia, the UAE, Iraq, Kuwait, Oman and Algeria said they would extend their voluntary oil production cuts until the end of 2024 as economic growth concerns weigh on the outlook for crude demand.

Saudi Arabia, the world's largest crude exporter, also said it would make an additional voluntary output cut of a million barrels per day in July, which could be extended if required, the kingdom's Energy Minister said during a press conference after Sunday's Opec+ meeting.

“This is a Saudi lollipop,” Prince Abdulaziz bin Salman told a news conference.

“We wanted to ice the cake. We always want to add suspense. We don't want people to try to predict what we do … This market needs stabilisation”.

“We will continue to hedge as long as we don't see clarity and stability.”

The UAE, Opec's third-largest producer, will have its voluntary cut of 144,000 bpd in place until the end of December 2024. Russia will also extend its voluntary output cut of 500,000 bpd until the end of next year.

In a separate statement on Sunday, the Opec+ alliance said it set a new production target of 40.46 million bpd throughout 2024.

“The revision to [production] baselines was likely a necessity for Opec+ to present a decision with a unified voice as several countries who have made heavy investment into upstream projects … had been forced to idle much of their overall capacity,” Emirates NBD said in a research note on Monday.

The latest developments follow a decision in April by nine Opec+ countries – Saudi Arabia, Iraq, the UAE, Kuwait, Oman, Algeria, Kazakhstan, Gabon and Russia – that enforced voluntary cuts of 1.66 million bpd. That agreement has now been extended until the end of 2024.

“This move will add limited short-term upside price pressure in the coming weeks,” said Rystad Energy senior vice president Jorge Leon.

“The long-term price development will hinge on macroeconomic sentiment and the possible extension of the voluntary Saudi production cut beyond July. The pure possibility of the Saudi production cut extending beyond July will limit downside price pressure for the rest of 2023.”

A sluggish globally economy and slower manufacturing activity in China, the word's biggest importer of crude, has weighed on oil prices.

Crude remained below $80 a barrel in May and dropped to $73 a barrel last week, its lowest since late 2021.

“The additional Saudi voluntary cut of 1 million bpd in July, with the option to extend, is likely to deepen the market deficit to more than 3 million bpd, which could add upside pressure in the coming weeks,” Mr Leon said.

Before the latest developments, Goldman Sachs projected that Brent would trade at $95 a barrel by the end of this year, from a previous estimate of $90, and $100 in 2024, compared with a previous forecast of $97.

The next Opec+ ministerial meeting will take place on November 26 in Vienna.

"Its noteworthy that Opec+ had until last weekend never cut within three months of a previous cut and thus is in itself an unprecedented development," said Ehsan Khoman, head of emerging markets research for Europe, the Middle East and Africa at Japan's largest bank.

Opec+ pricing power is now larger-than-usual as the formation of the alliance in 2016 has boosted the producer group’s market share, amid the low price elasticity of non-Opec+ oil supply, and limited spare capacity that are restraining competitors’ ability to offset Opec+ production cuts, Mr Khoman said.

"Global oil demand is now inelastic given the lack of substitutes in an energy constrained world," he said.

MUFG expects that the market will return to sustained deficits from June onward, owing to the rapid growth in emerging markets, underpinned by demand from China and India, two of the world's biggest crude importers, amid sluggish US supply.

"Looking ahead, our conviction is that the group’s greater-than-historical pricing power offers the space for it to deliver additional cuts in the second half of the year should Brent oil prices remain persistently below our Opec+ put of $75 per barrel," Mr Khoman said.