Saudi Arabia and Russia extend oil cuts, pushing Brent crude to ten-month high

The global oil market experienced a significant shift as Saudi Arabia and Russia disclosed their decision to prolong voluntary oil production cuts until the end of the year. This announcement pushed Brent crude prices to a peak unseen in the last ten months, reported Bangkok Post.

The energy ministry of Saudi Arabia, the world’s leading crude oil exporter, stated that their reduction of one million barrels per day, initiated in July, would be upheld for another three months, lasting till December this year. Concurrently, Russia confirmed its intention to maintain its export cut of 300,000 barrels per day for the same duration, as acknowledged by Deputy Prime Minister Alexander Novak.

The news triggered an immediate market response, with Brent crude surpassing the US$90 (3,193 baht) per barrel mark for the first time since the previous November. West Texas Intermediate, the primary US futures contract, experienced a 1.9% surge, reaching US$87.16 (3,093 baht).

The oil production cut by Saudi Arabia initially followed a June meeting of the OPEC+ alliance, a 23-nation group that counts Russia among its members. The energy ministry’s statement indicated that the decision would undergo monthly reviews to contemplate either an intensification of the cut or a production increase.

April saw several OPEC+ members voluntarily reducing production by over one million barrels per day, an unexpected decision that briefly bolstered prices without actualising a long-term recovery. October of the previous year had seen Opec+ agreeing to a two million barrels per day output reduction, a move that drew criticism from the United States, which accused Saudi Arabia of siding with Russia in the Ukraine conflict.

As the Saudi-only cut took effect in July, oil prices climbed past the US$80 (2,837 baht) per barrel mark, a threshold that analysts believe Riyadh requires to balance its budget. This figure could potentially rise due to the impact of the various production cuts.

Despite a boost in oil prices due to the additional cuts, the reduction has imposed a fiscal burden on Saudi Arabia. The country’s supply has been decreased by 10%, on top of the 10% cuts agreed upon in the October and April OPEC+ meetings. The country’s daily production now stands at around nine million barrels per day, significantly lower than its reported daily capacity of 12 million barrels per day.

Oil giant Saudi Aramco, a key player in the Saudi economy, reported a 38% fall in profits for the second quarter of 2023, amounting to $30.08 billion (approximately 10.66 trillion baht). This decline was attributed to lower crude oil prices and weakened refining and chemical margins.

Despite these setbacks, Aramco’s CEO, Amin Nasser, reaffirmed the company’s ability to satisfy customer needs and predicted a surge in global demand due to broader economic recovery and stronger-than-expected demand from China.

Saudi Arabia, which owns 90% of Aramco’s shares, relies heavily on its revenue to fund Crown Prince Mohammed bin Salman’s ambitious economic and social reform programme, Vision 2030, which seeks to transition the economy away from fossil fuels.

As an offset to the revenue lost due to the additional cuts, Aramco announced a new performance-linked dividend of US$9.9 billion (approximately 350 billion baht) for the third quarter, with similar payments expected over the following six quarters.

In related news, OPEC+ agrees to the extended production cuts to boost flagging oil prices.

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