Crude oil prices surge as Saudi Arabia, Russia commit to output cuts until year-end

Futures for international oil benchmark Brent crude held above $90 per barrel on Thursday after hitting over ten-month highs in the previous sessions as OPEC+ majors Saudi Arabia and Russia extended their voluntary supply cuts until the end of the year.

Futures for West Texas Intermediate, a benchmark for U.S. oil, traded around $87 on both Wednesday and Thursday following the announcements.

The decisions squeezed supply by a deeper-than-expected amount amid rising global demand. Markets had originally anticipated a one-month extension.

On Wednesday, September 5, the Saudi Press Agency announced that Saudi Arabia will continue its voluntary reduction in oil production, amounting to one million barrels per day, extending it through December. Similarly, Russia has committed to maintain its production cut of 300,000 barrels per day for the same period, as stated by Deputy Prime Minister Alexander Novak.

The decision “is aimed at strengthening the precautionary measures taken by OPEC+ countries in order to maintain stability and balance of oil markets,” Novak said.

Although Saudi Arabia will review the decision monthly, “we don’t sense any urgency” to change course, wrote Helima Croft, RBC Capital Markets’ head of global commodity strategy, in a note cited by Barron’s. The United States now has fewer options to tame crude prices, having tapped supplies from Iran and Venezuela.

White House National Security Adviser Jake Sullivan refrained from discussing the market's reaction to the decision but mentioned that U.S. officials maintain regular communication with Saudi Arabia. He also stated that President Biden would explore “everything within his toolkit” to support American consumers.

Bloomberg Economics has suggested that, due to reduced sales volumes, Saudi Arabia may require oil prices to approach nearly $100 a barrel to finance Crown Prince Mohammed bin Salman's ambitious spending initiatives as part of Vision 2030 — an ambitious plan to overhaul the kingdom’s economy, which includes massive infrastructure projects such as the construction of a $500 billion city called Neon.

This comes after the International Monetary Fund significantly revised down the kingdom's economic growth forecasts in late July. The IMF’s 2023 growth projection for Saudi Arabia now stands at 1.9% — down from a 3.1% projection in May.

Markets.com Chief Market Analyst Neil Wilson highlighted the Saudis’ readiness to stick to the cuts in a note to clients on Wednesday:

“I think it shows the Saudis’ commitment to maintaining balance in the oil market – they are fairly comfortable with these voluntary production cuts for the time being and want the market to know it. This could see some more oil shorts who have been holding out finally throw in the towel with the breakout from the bottom formation now looking even healthier. Russia had hinted at this last week...we think maybe they go along with it – shows OPEC+ is holding together; and there is shortage of barrels in the physical market as all the 2023 increase in US crude stocks have been cleared, the latest EIA report showing healthy demand.”

Trading on Thursday, September 6, saw both Brent crude and U.S. oil benchmark WTI hold their Wednesday gains, trading around $90 and $87 respectively, according to Marketwatch data.

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Output cut impact: Crude producers stocks surge, Brent hovers around $90

Energy company stocks jumped in value following the announcements, with Halliburton closing up by 2.2% on Wednesday and Occidental Petroleum (OXY) rising by 2.5%.

The moves should dispel any concern that increasing exports from other OPEC producers, such as Iran and Nigeria, would negate efforts by the alliance to balance the market, wrote Daniel Hynes, a commodity analyst at New Zealand lender ANZ Bank.

"In fact, the market is likely to see sizeable drawdowns in inventories are a result of the restrictions on output. This comes after US oil inventories fell while demand topped pre-pandemic levels in May and June, according to EIA data,” Hynes wrote in the latest edition of his Daily Commodities Wrap.

“The impact these cuts will have on inflation and economic policy in the West is hard to predict, but higher oil prices will only increase the likelihood of more fiscal tightening, especially in the U.S., to curtail inflation,” Jorge Leon, a senior vice president at Rystad Energy, told the Associated Press.

Crude oil price forecast: Analysts see further upside as cuts persist

Markets.com Chief Market Analyst Neil Wilson offered his technical outlook on the spot WTI price after news of the cuts went public:

"[The spot WTI price is] clearing the bottom - MACD is bullish still but RSI looks overextended though and could be one that fades. Continuation could call for Oct-Nov double top at $92-93. Failure back to $83 in near term, 21-day EMA at $81.70.”

WTI price forecasts from economics data aggregator TradingEconomics saw the commodity trading at a potential $88.32 per barrel by the end of this quarter. The platform estimated the U.S. oil benchmark to rise further in the next 12 months, forecasting it to trade at $96.18 by September 2024.

Last week, Barclays raised its Brent price forecast for 2024 by $8/bbl to $97/bbl, as the bank expected market balances to tighten further into the year.

"Slowing non-OPEC+ supply growth, driven primarily by the US, and persistent underproduction from several OPEC+ producers due to structural constraints bolsters our core thesis behind a constructive view on oil prices," Barclays said in a note cited by Reuters.

The crude oil forecast from the U.S. Energy Information Administration (EIA) — yet to be updated — last read that the Brent price would maintain around the $88/bbl level throughout the end of the year, remaining close to that mark in first quarter of 2024 (Q1 2024). The agency wrote:
“The Brent price in our forecast averages $86/b in the second half of 2023 (2H23) and reaches $88/b in November and December and remains near that level in the first quarter of 2024 (1Q24). Crude oil prices begin to ease in 2Q24 as supply growth leads to some rebuilding of global oil inventories later in 2024. The Brent price in our forecast averages $86/b in 2024.”

When considering commodities Crude Oil spots and futures for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.