Crude oil surges as Saudi Arabia extends voluntary cuts in production
Saudi Arabia’s energy ministry said the country will implement an additional voluntary cut of 1 million-barrel-per-day in July, which may be extended.
PremiumNEW DELHI : With Saudi Arabia announcing an additional production cut of crude oil, international crude oil prices surged over 2% on Monday.
The August contract of Brent on the Intercontinental Exchange rose 2.10% to $77.73 per barrel, and the July contract of West Texas Intermediate (WTI) was trading at $73.38 a barrel, higher by 2.29% from its previous close, at the time of writing the story.
Saudi Arabia’s energy ministry said the country will implement an additional voluntary cut of 1 million-barrel-per-day in July, which may be extended. 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 barrels per day (bpd) in July from over 10 million bpd in May.
The Saudi energy minister Prince Abdulaziz bin Salman said the country “will do whatever is necessary to bring stability to this market“.
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 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, or ‘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.
He further 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 rise.
“For the Indian economy a higher 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," he said.
Volatility in international crude oil prices has a significant impact on 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 and Energy, Resources and Industrials industry Leader, Deloitte India.
In the last financial year Russia emerged as the largest exporter of oil to India 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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