Saudi Arabia to likely roll over 1 million bpd output cut into October: What lies ahead for oil prices?

Saudi Arabia will likely roll over the voluntary oil cut of 1 million barrels per day (bpd) for a third consecutive month into October amid uncertainty about supplies and as the kingdom targets pulling down global inventories further, according to analysts quoted in a report by news agency Reuters.

The Organization of the Petroleum Exporting Countries and allies (OPEC+) led by Russia, agreed a broad deal in June to curtail the supplies until the end of 2024. Saudi Arabia, at the time, alone announced the additional voluntary cut which brought its oil production to a multi-year low of 9 million bpd.

Earlier this month, the kingdom extended the voluntary cut into September, with the country's energy ministry saying that it could be "extended, or extended and deepened".

Russia will also cut oil exports by 300,000 bpd in September, announced Deputy Prime Minister Alexander Novak shortly after the Saudi Arabia's decision. Brent oil prices in July were up 14 per cent on the previous month, the biggest monthly increase since January 2022. 

Prices in August are trending about 3 per cent lower on the previous month weighed by China demand worries. China has also been drawing on record inventories amassed earlier this year as higher oil prices drive refiners in the world's biggest oil importer to scale back purchases, according to analysts quoted in the report.

Why are Saudi Arabia and Russia cutting oil supply?

The Saudis are particularly keen to boost oil prices in order to fund Vision 2030, an ambitious plan to overhaul the kingdom's economy, reduce its dependence on oil and create jobs for a young population. The plans include several massive infrastructure projects, including the construction of a futuristic $500 billion city called Neom, according to The Associated Press.

Higher prices would also help Russian President Vladimir Putin fund his war on Ukraine, as Western countries have used a price cap to try to cut into Moscow's revenues, as per the report. Western sanctions mean Moscow is forced to sell its oil at a discount to countries like China and India. Its estimated export revenue fell by $1.4 billion to $13.3 billion in May, down 36 per cent from a year ago, the International Energy Agency said in a report in June.

What lies ahead for oil prices?

In the previous session, oil futures climbed about 1 per cent to a one-week high as US diesel prices soared, the number of oil rigs dropped and a fire broke out at a refinery in Louisiana, according to Reuters.

Brent futures rose $1.12, or 1.3 per cent, to settle at $84.48 a barrel, while US West Texas Intermediate (WTI) crude rose 78 cents, or 1 per cent, to settle at $79.83. Diesel futures soared about 5 per cent to a near seven-month high, boosting the diesel crack spread , a measure of refining profit margins, to its highest since January 2023, according to Reuters.

Weak economic data and a stronger US dollar limited gains. For the week, Brent declined less than 1 per cent and WTI lost about 2 per cent. Last week, both benchmarks fell about 2 per cent.

Crude prices settled higher despite weak economic news from Germany, Europe's biggest economy, and the US dollar rose to an 11-week high against a basket of other currencies after US Federal Reserve Chair Jerome Powell said further interest rate hikes may be needed to fight inflation.

Higher interest rates can slow economic growth and reduce oil demand. A stronger US dollar can also slow demand by making oil more expensive for holders of other currencies.

Morgan Stanley expects Brent crude prices to be well supported around $80 per barrel as the oil market is likely to remain in a deficit in the second of half of 2023 before returning to a small surplus next year. Morgan Stanley has raised its 2023 oil demand forecast to 2.1 million barrels per day from 1.8 million.

"Strong refined products markets and deep OPEC cuts have been supporting crude oil prices," analysts at the bank said in a note last week. Although OPEC's production cuts will have a bullish impact on oil prices in the near future, spare capacity is at its highest in 20 years and a decline in the group's market share could weigh on prices in the longer term, added Morgan Stanley.