Oil prices surge as Saudi Arabia announces voluntary output cut

  • Saudi Arabia’s energy ministry Prince Abdulaziz bin Salman said the country may extend the production cut going ahead and do whatever is necessary to bring stability to this market

Rituraj Baruah
First Published5 Jun 2023
Saudi Arabia's Minister of Energy Prince Abdulaziz bin Salman Al-Saud.
Saudi Arabia’s Minister of Energy Prince Abdulaziz bin Salman Al-Saud.(Photo: Reuters)

New Delhi: Crude oil prices surged over 2% globally on Monday with Saudi Arabia announcing an additional voluntary cut of 1 million barrel per day (bpd) in July.

The August contract of Brent on the Intercontinental Exchange was currently 2.10% higher at $77.73 per barrel, and the July contract of West Texas Intermediate (WTI) was at $73.38 a barrel, higher by 2.29% from its previous close.

Saudi Arabia’s energy ministry Prince Abdulaziz bin Salman said the country may extend the production cut going ahead and “will do whatever is necessary to bring stability to this market“. 

The move gains significance as Saudi Arabia is the largest supplier among the members of the Organization of the Petroleum Exporting Countries (Opec). The decision is likely to take the country’s output to 9 million bpd in July from over 10 million bpd in May.

Ravindra V. Rao, head of commodity research at Kotak Securities said: “WTI Crude oil futures edged higher after Saudi Arabia surprised markets with an additional 1 mbpd for the month of July, on top of Saudi Arabia’s existing voluntary cut of 0.5 mbpd announced in April. The kingdom also said the latest cut could be extended depending on market conditions. This brings Saudi Arabia’s total production levels to around 9 mbpd in July compared with 10.5 mbpd in April.”

He said that markets are likely to see a deficit in the second half of 2023, if Chinese demand recovery materializes. “With rising odds of a Fed pause in June coupled with tightening supplies, we might see oil prices trading with an upside momentum,” Rao said.

Although OPEC and its allies including Russia, commonly known as ‘OPEC+’, in their 35th ministerial meeting on Sunday made no changes to its planned oil production cuts for this year, the alliance announced to “adjust the level of overall crude oil production for OPEC and non-OPEC Participating Countries in the DoC (Declaration of Cooperation) to 40.46 mb/d (million barrels per day), starting 1 January 2024 until 31 December 2024”.

Previously, the alliance agreed to a 2 million barrels-per-day decline in October. Some OPEC+ members also announced voluntary cuts amounting to around 1.6 million barrels per day in April.

Prashant Vashisht, vice-president of Corporate Ratings, Icra however, noted that crude oil prices have, of late, been under pressure owing to weaker-than-expected demand from China and recessionary trends in several western economies. “Accordingly, the impact which would be a result of these two opposing trends remains to be seen,” he said.

In case crude oil prices increase, upstream companies like ONGC and Oil India would benefit from higher realizations and cash accruals on crude oil sales, while the marketing profits of oil marketing companies would decline or turn to losses depending upon the extent of the rise, he added.

For the Indian economy, an increased crude rate would imply a higher import bill and forex outgo besides having an inflationary impact. With regard to the global economy a higher crude price would lead to inflation thereby accentuating recessionary trends,” Vashisht said.

Volatility in international crude oil prices plays major role for the Indian economy as the country imports around 85% of its energy requirement and cost of energy imports is a major part of the country’s import bill.

India imported crude oil worth $158.3 billion in the last fiscal (FY23) up from $120.7 billion in 2021-22, as per data from the Petroleum Planning & Analysis Cell.

However, some analysts feel, given that India has increased its oil imports from Russia and the share of import from the West Asian countries including Saudi Arabia has declined in the past one year, supplies to India may not be impacted due to the output cut.

“Saudi Arabia has announced further cuts, which may result in some short-term changes in the oil markets until it stabilizes over the next few months. India however is likely to be impacted to a very marginal extent, given the increase in crude purchases from Russia” said Ashwin Jacob, partner Deloitte India.

In the last financial year Russia emerged as the largest exporter of oil to India in the last financial year with 50.84 million tonnes of crude supplies, according to data from the commerce and industry ministry, followed by Iraq, Saudi Arabia, UAE and the US which supplies 50.31 mt, 39.37 mt, 21.50 mt and 15.16 mt to India during the financial year ending 31 March, 2023.

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