Oil prices rally as Saudi Arabia extends output cut of 1 million bpd

Kingdom’s production for August will be about 9 million barrels per day

A supply ship at the Edvard Grieg oil field in the North Sea. AP

Oil prices rallied on Monday after top crude exporter Saudi Arabia said it would extend its voluntary output cut of 1 million barrels per day until August.

Brent, the benchmark for two thirds of the world’s oil, was trading 0.91 per cent higher at $76.10 a barrel at 4.16pm UAE time, while West Texas Intermediate, the gauge that tracks US crude, was up 1.10 per cent at $71.42 a barrel.

The kingdom will extend the production cut, which was initially announced for July, for another month, the Saudi Press Agency reported on Monday, citing an official source from the Ministry of Energy.

Saudi Arabia's production for August will be about 9 million bpd and "this additional voluntary cut comes to reinforce the precautionary efforts made by Opec+ countries with the aim of supporting the stability and balance of oil markets", the source said.

The kingdom will likely choose to prolong its additional cuts over "much of the rest of 2023", Emirates NBD economists said in a research note on Monday.

The Opec+ alliance of 23 oil-producing countries plans to stick to its existing output cuts until the end of 2024.

The group has total production curbs of 3.66 million bpd, or about 3.7 per cent of global demand, in place, including a 2 million bpd reduction agreed last year and voluntary cuts of 1.66 million bpd announced in April.

Last Friday, oil prices posted their fourth straight quarterly loss on a weakening fuel demand outlook and as Russian crude supply remains steady despite Western sanctions.

The US Department of Energy plans to solicit more oil purchases this week as part of a drive to refill the Strategic Petroleum Reserve, according to a Bloomberg report.

The US previously said it would buy 12 million barrels to help replenish the reserve following the largest ever drawdown from the emergency stockpiles last year amid the turmoil from Russia’s invasion of Ukraine.

Separately, a key inflation measure monitored by the US Federal Reserve showed prices cooling in May, in a sign that the central bank's interest rate increases are easing pressures.

The price consumption expenditures index increased 3.8 per cent on an annual basis in May, down from 4.3 per cent a month in April.

The core PCE index, which excludes food and energy, rose 4.6 per cent on an annual basis, after a 4.7 per cent yearly increase the month before.

“The focus this week will be on the release of the minutes of the June [Federal Open Market Committee] meeting on Wednesday and then the non-farm payrolls data on Friday,” Emirates NBD said.

US employers likely added 225,000 jobs last month, lower than the 339,000 recorded in May, with the unemployment rate expected to ease back to 3.6 per cent from 3.7 per cent, the UAE-based lender said.

Earlier this month, the Fed hit pause on raising interest rates for the first time since it started its monetary tightening cycle in March 2022 as it assesses the impact on the economy.

However, the central bank signalled it would resume raising rates again this year if needed. Its next meeting will be on July 25 and July 26.

Meanwhile, factory activity growth in China, the world’s second largest economy and top crude importer, slowed in June.

The Caixin/S&P Global manufacturing purchasing managers' index (PMI) eased to 50.5 last month from 50.9 in May. The 50-point index mark separates expansion from contraction.

After rising at the quickest rate in 11 months in May, Chinese manufacturing output expanded only slightly in June.

However, a back-to-back rise in total new order volumes led companies to expand their purchasing activity again last month, the survey found.

“This in turn contributed to a further increase in inventories of inputs, though the rate of accumulation was only marginal," it said.