Saudi Arabia to further reduce output as OPEC+ sticks to 2023 production cut target

The Organization of the Petroleum Exporting Countries and its partners (OPEC+) decided June 4 to maintain its production cut targets for 2023, but agreed to set a new, lower target for 2024. Meantime, Saudi Arabia said on June 4 that it would unilaterally cut oil production by 1 million b/d in July for a month with the possibility of an extension. Saudi crude production in July would drop to just below 9 million b/d, its lowest level since June 2021.

A number of OPEC+ producers (Saudi Arabia, Iraq, UAE, Kuwait, Algeria, Kazakhstan, Oman, and Gabon) surprised the market by announcing voluntary production cuts of 1.16 million b/d in April (OGJ Online, July 4, 2023). The cuts came into effect in May and will last until end-2024 under the latest agreement on June 4. Russia’s voluntary 500,000 b/d cuts, initially starting in March, will also be extended until end-2024 (OGJ Online, Mar. 21, 2023). All these voluntary production cuts are in addition to the official cuts of 2 million b/d announced back in October 2022 for the period November 2022 to December 2023.

The new OPEC+ production target for 2024 is 40.46 million b/d, which is 1.4 million b/d lower than this year's target. The new production targets for 2024 include significant reductions in Russia (650,000 b/d), Nigeria (360,000 b/d), and Angola (175,000 b/d), effectively bringing them in line with current actual production levels. In contrast, the new target allows for an increase of 200,000 b/d to the UAE's target output.

The 36th OPEC+ Ministerial Meeting is planned for Sunday, Nov. 26, 2023, in Vienna.

Market feedback

While voluntary OPEC+ production cuts initially pushed prices to $87/bbl in mid-April, macroeconomic headwinds and strong oil production growth outside of OPEC+ kept crude oil prices well below $80/bbl in May. Oil prices fell recently to $73/bbl, the lowest level since late 2021.

In terms of world oil demand and supply fundamentals, the additional Saudi cut will likely expand a previously expected supply deficit in third-quarter 2023, with rising refining runs and end demand. According to a modelling analysis of Rystad Energy, the additional Saudi voluntary cut of 1 million b/d in July, with the option to extend, is likely to deepen the market deficit to more than 3 million b/d, which could add upside pressure to oil prices in the coming weeks.

In the medium term, voluntary production cuts extended to 2024 could represent a bullish development, but macroeconomic pressures and non-OPEC+ production growth may eventually dominate the balance next year, putting downward pressure on crude oil prices.