Oil prices were hovering at a 10-month high after Saudi Arabia and Russia said they would extend supply cuts of a combined 1.3 million barrels per day to the end of the year.
Brent, the benchmark for two thirds of the world’s oil, was trading 0.21 per cent higher at $90.23 a barrel at 8pm UAE time on Wednesday, while West Texas Intermediate, the gauge that tracks US crude, was 0.44 per cent higher at $87.07 a barrel.
Brent rallied yesterday following the announcement gaining 1.2 per cent at market close and settling at $90.04, while WTI ended the day 1.3 per cent higher at $86.69.
As part of their voluntary cuts, Saudi Arabia is extending its one million bpd output reduction until December, while Russia is rolling over its export cut of 300,000 bpd until the end of the year.
“This is a clear indication that oil prices trump volumes for the kingdom,” said Rystad Energy’s senior vice president Jorge Leon.
“These bullish moves significantly tighten the global oil market and can only result in one thing: higher oil prices worldwide. The decisions surprised oil markets, and prices reacted strongly and suddenly following the announcements.”
Tightening market conditions come amid concerns about a demand slump due to sluggish economic growth in China, the world's second largest economy and top oil importer.
China's economy expanded an annual 6.3 per cent from April to June, after growing 4.5 per cent in the previous three months, according to the latest data from the National Bureau of Statistics. The pace of growth in the second quarter missed the 7.1 per cent estimate of economists polled by Bloomberg and the 7.3 per cent forecast of those surveyed by Reuters.
China's services activity grew at the slowest pace in eight months in August amid weak demand, a private sector report said on Tuesday.
The Caixin/S&P Global services purchasing managers' index slipped to 51.8 last month from 54.1 in July, indicating a softer expansion in the country’s service sector output.
Saudi Arabia began implementing its cut in July, which was later extended to include August and September.
“In effect, the kingdom’s production for the coming months of October, November and December will be approximately nine million barrels per day,” the Saudi Press Agency reported on Tuesday, citing a Ministry of Energy official.
The decision seeks to “reinforce the precautionary efforts made by Opec+ countries with the aim of supporting the stability and balance of oil markets”, and it will be reviewed monthly in the context of market conditions, SPA said.
The latest move by Russia, which had already pledged to reduce its production by 500,000 bpd until the end of 2024, aims to maintain “stability and balance” in oil markets, Deputy Prime Minister Alexander Novak said on Tuesday.
At its August meeting, producers group Opec+ agreed to keep to its current output policy.
The alliance of 23 oil-producing countries has total production cuts in place of 3.66 million bpd, which includes a two million bpd reduction agreed on last year as well as voluntary cuts of 1.66 million bpd announced in April.
“This policy flexibility allows Saudi Arabia to retain control of the oil market,” said UBS strategist Giovanni Staunovo.
“Russia’s participation is also important, as the country is the second largest producer in the Opec+ group and the deal ensures close co-ordination between the two producers.”
UBS expects a market deficit of more than 1.5 million bpd in the fourth quarter of 2023 and with oil inventories set to fall further over the coming months, it is forecasting Brent to rise to $95 a barrel by the end of the year.
MUFG Bank maintained its yearend 2023 and 2024 Brent crude target of $84 a barrel and $87 a barrel, respectively, with a surge back north of $100 a barrel.
"Our reading of this development is that Opec+ is categorically exercising, in today’s underinvested environment, its inelastic pricing power – that is, its ability to raise prices incrementally without significantly hampering its demand," MUFG said.
Extending production cuts "once again highlights the kingdom’s strong message to 'do whatever is necessary to bring stability to this market'", it said.
