Extension of Saudi cuts will keep oil market tight

Saudi Arabia has announced it will extend its 1m b/d of additional production cuts until the end of 2023, aiming for oil output of 9m b/d. In tandem, Russia will extend the 300k b/d of curbs on its oil exports until the end of the year.

Saudi Arabia began to cut beyond its OPEC+ target levels from July and rolled over the 1m b/d cuts for both August and September. When the new OPEC+ targets for 2023-24 were announced at the start of June we had assumed that Saudi Arabia would keep its 1m b/d of voluntary cuts in place until the end of the year so the impact on our oil production forecast is limited by the extension. Saudi’s oil production fell to 8.98m b/d in August, near on 100% compliance with its target level of 9m b/d. Russia’s oil production has been declining steadily over the last several months with the IEA estimating output of 9.4m b/d in July compared with closer to 9.8m b/d at the start of the year.

The impact of the Saudi-Russian curbs will be more pronounced in oil market balances. We had long been forecasting a deep deficit developing in H2 2023 based on our expectation that Saudi Arabia would limit oil output for a prolonged period. We are now more convinced of that view and would expect to see material draws on stockpiles in the coming months.

Spot oil prices rose to their highest level since November 2022 in response to the news from Saudi Arabia and Russia but given that the extension of cuts was widely expected, the moves were relatively contained. Brent futures have now moved back up to a USD 90/b level while WTI is trading just shy of USD 87/b. Prices may have a little more upside risk from here but to consolidate around these levels we would need to see more positivity around the broader macro narrative, particularly from China. Oil demand from China has in fact been good so far in 2023 despite the slowdown in the economy, but the weak economic data has dampened upside for oil prices. Given we had based our oil market balance and price assumptions on Saudi Arabia extending its cuts, we are holding our price targets unchanged. Nevertheless, there are now upside risks to our Brent forecasts of USD 82.50/b for Q3 and USD 85/b for Q4, particularly if there is greater stabilization in China’s economy.