Saudi Arabia has strategically kept its plan to significantly reduce its own oil output during the OPEC+ talks in Vienna under wraps, according to multiple OPEC+ sources who spoke to Reuters. The reduction came as a surprise to some member states, who only learned about it during the final news conference. As the leading OPEC producer and the country with the most flexibility in adjusting output, Saudi Arabia holds substantial influence over the oil market. Despite the announcement of the output cut, the impact on oil prices has been relatively limited thus far.
The Saudi Energy Minister, Prince Abdulaziz bin Salman, has a history of utilizing surprise tactics to manage oil markets. With concerns about the global economy’s weakness and its impact on oil demand, Prince Abdulaziz had previously warned short sellers, those betting on falling oil prices, to be cautious. The output cut, referred to as a “Saudi lollipop,” was announced after the meeting.
Four OPEC+ sources involved in policy talks revealed that they were not informed about the additional cut until the Sunday evening news conference, and the topic of a cut did not arise during discussions on a broader deal to limit supply into 2024. The 10% or 1 million barrels per day (bpd) cut in July to 9 million bpd was declared by Saudi Arabia, with the possibility of further extensions if necessary. While OPEC+ agreed to extend cuts into 2024, no fresh cuts were committed for 2023.
OPEC+ represents the collaboration between the Organization of the Petroleum Exporting Countries (OPEC) and allied nations, primarily led by Russia, accounting for approximately 40% of global crude production. In addition to the Saudi cut, OPEC+ also lowered its collective production target for 2024, and the nine participating countries extended the voluntary cuts implemented in April until the end of 2024.
Another notable development was the United Arab Emirates (UAE) successfully securing a higher output quota, resolving a longstanding issue that had strained relations within the group. The UAE had been aiming to increase its output capacity, and this agreement provided significant relief for Saudi Arabia.
Leading up to the meeting, there were discussions within OPEC+ regarding additional cuts; however, these discussions did not progress in Vienna. Saudi Arabia acknowledged the challenges of persuading other countries, such as the UAE and Russia, to agree to further cuts. While the UAE seemed content with the new quota, Russia was reportedly hesitant to decrease output any further.
Nevertheless, Saudi Arabia managed to convince other OPEC+ members, particularly Nigeria and Angola, which were unable to produce at the required levels due to inadequate investment in capacity, to accept lower production targets for 2024. Prince Abdulaziz expressed frustration with countries that consistently failed to meet their quotas and emphasized the importance of Russia providing transparency regarding its output and export levels.
Although the new production targets for Angola and Nigeria still exceed their realistic pumping capabilities, they are not required to implement actual cuts. Russia, despite facing Western sanctions, also avoided making additional reductions. It remains unclear whether Saudi Arabia hinted at its voluntary cut to certain Russian or African officials to facilitate a broader agreement.
In conclusion, the Saudi output cut has the potential to increase prices, which could benefit all producers who maintain or slightly increase their output. Additionally, it could grant Saudi Arabia more leverage in pressuring countries that are not reducing output but still benefit from the cuts implemented by others. Oil prices have experienced a slight increase following the Saudi plan, with Brent crude trading above $77, up from the previous close above $76. However, concerns regarding the global economy continue to overshadow the impact of the Saudi cuts, according to Stephen Brennock, an oil broker at PVM, although he acknowledged that the Saudi cut could widen the supply deficit in July.
