Oil prices edge higher after Saudi Arabia and Russia announce output cuts

The kingdom extends its voluntary production drop of one million barrels per day until August

Saudi Arabia's Minister of Energy Prince Abdulaziz bin Salman speaking at an event in Riyadh. AFP

Oil prices edged higher on Tuesday after Saudi Arabia and Russia announced output cuts for August, stoking concerns over tight supply.

Brent, the benchmark for two thirds of the world’s oil, was trading 2.14 per cent higher at $76.25 a barrel at 10.56pm UAE time, while West Texas Intermediate, the gauge that tracks US crude, was up 1.73 per cent at $71 a barrel.

On Monday, Brent rose nearly 2 per cent before settling 1.01 per cent lower at $74.65 a barrel, while WTI was down 1.20 per cent $69.79.

“The Saudi extension should have been expected by everyone, but the Russian export cut news did surprise many energy traders,” said Edward Moya, senior market analyst at Oanda.

Saudi Arabia, the world’s largest oil exporter, will extend its production cut of one million barrels per day, 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.

The kingdom’s production for August will be about nine 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.

Saudi Arabia’s output will be near its lowest levels since the peak of the pandemic, Emirates NBD economists said in a research note on Tuesday.

In April 2020, the Opec alliance of 23 oil-producing countries announced its largest-ever production cut of 9.7 million barrels per day as Covid-19 lockdowns decimated global fuel demand and took Brent crude below $30 a barrel.

“We expect Saudi Arabia will keep output constrained for the remainder of 2023, only incrementally adding supplies to the market,” Emirates NBD said.

Russia will also cut its oil supplies by 500,000 bpd next month on top of the output reductions that have already been announced, state news agency Tass reported, citing a representative for Deputy Prime Minister Alexander Novak.

“Russian oil exports hit prewar levels in April and Asian demand kept on taking advantage of the Russian discounts,” Mr Moya said.

“[Moscow] has hardly been crippled by western sanctions as they have been able to sell crude to India, China and Turkey.”

Last month, Opec agreed 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 two million bpd reduction agreed last year and voluntary cuts of 1.66 million bpd announced in April.

Meanwhile, US manufacturing activity slumped further in June, reaching levels last seen in April 2020.

The ISM’s manufacturing PMI fell to 46.0 last month, down from 46.9 in May. The PMI remained below 50 for the eighth consecutive month, indicating contraction in the sector.

However, the prices paid for inputs fell sharply to 41.8, suggesting that goods inflation may continue to slow.

“The employment component of the ISM survey showed a decline in manufacturing jobs in June after two months of modest gains in employment,” Emirates NBD said.

The probability of a recession in the US over the coming year has dropped to 25 per cent as uncertainty triggered by the disruptive debt ceiling fight has dissipated, Goldman Sachs said.

The chances of contraction in the world’s biggest economy over the next year have come down from an earlier projection of 35 per cent as the banking sector distress appears to have only a modest economic impact, the investment bank said in its latest report on the US economy.

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 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.