Oil prices surge as Saudi Arabia extends crude production cut until December.
Crude Oil Prices Soar as Saudi Arabia Extends Production Cut
Crude oil prices have skyrocketed following Saudi Arabia’s decision to extend its voluntary production cut of 1 million barrels per day (bpd) for another three months until the end of December 2023, according to state-owned media.
Under this extension, Saudi Arabia’s output will reach 9 million bpd in October, November, and December.
“The source stated that this voluntary cut decision will be reviewed monthly to consider deepening the cut or increasing production,” the Saudi Press Agency reported on Sept. 5.
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“The source also noted that this cut is in addition to the voluntary cut previously announced by the kingdom in April 2023, which extends until the end of December 2024.”
The news of the production cut extension has caused October West Texas Intermediate (WTI) crude futures to surge by as much as 2 percent, reaching above $87 a barrel on the New York Mercantile Exchange. Brent, the international benchmark for oil prices, has surpassed $90 a barrel on London’s ICE Futures exchange.
Year-to-date, U.S. and Brent have seen an increase of 8 percent and 5 percent, respectively.
Big Trouble in China
Major oil producers around the world are growing concerned about China’s ongoing economic slowdown, which could have a negative impact on energy demand.
In August, the Caixin Services and Composite Purchasing Managers’ Indexes (PMIs) weakened to 51.8 and 51.7, respectively, both indicating expansion but at their lowest levels since January.
This comes after the National Bureau of Statistics (NBS) reported that manufacturing activity in China contracted for the fifth consecutive month in August.
Despite the economic slowdown, China’s oil imports have remained strong, with a year-over-year increase of over 12 percent in the first seven months of 2023, totaling nearly 326 million metric tons. Crude imports in July were up 17 percent compared to the same period last year.
However, there are concerns about long-term demand from China, with some experts suggesting that India offers greater potential for oil demand growth due to its robust economy.
“China has been supporting the global crude demand for the past 20 years, but in the coming three to five years, China’s demand is going to peak and then it will start to decline. The global market has to look at India or other countries for demand resilience,” said FGE Chairman Fereidun Fesharaki during a panel discussion at the Asia Pacific Petroleum Conference (APPC) 2023.
Kang Wu, global head of demand research at S&P Global, warned that peak oil demand in China will arrive earlier than in India due to the emerging market’s “economic expansions and a young population.”
Additionally, a report from China’s largest oil company Sinopec suggests that national gasoline demand may have already peaked due to the increasing adoption of new energy vehicles, which has risen by 38 percent this year.
Oil Markets Feeling Tight
While concerns about demand persist, data indicates that global oil markets are tightening and will shift into a deficit this month.
“Our balance shows that the market will remain in deficit over 2024,” wrote Warren Patterson, the head of commodities strategy at ING, in a research note.
ING analysts predict further increases in oil prices, with WTI and Brent reaching $92 and $88 per barrel, respectively, in the fourth quarter. They also forecast that WTI and Brent will climb to $93 and $96 in the fourth quarter of next year.
“The assumption behind our 2024 forecasts is that OPEC+ sticks to its planned production targets, while the additional voluntary cuts from a handful of OPEC+ producers also continue through 2024,” added Mr. Patterson.
Ben Luckock, co-head of oil trading at Trafigura, explained during an APPC panel discussion that oil is vulnerable to price spikes “because of the long-term underinvestment in new oilfields.”
In the U.S., drilling activity has slowed down this year, with the number of active oil rigs decreasing by about 15 percent since the beginning of the year.
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