Efforts by OPEC+ fail to yield desired results as oil prices remain under pressure
Major oil producers are grappling with stabilizing oil market prices above the current, but their influence to do so seems to be waning.
Both Riyadh and Moscow need high oil prices, with Saudi Arabia requiring Brent crude to trade at approximately US$81 a barrel to balance its budget, according to the International Monetary Fund. Moscow also needs increased cash flow to continue its war in Ukraine.
However, market indicators are less than encouraging. Persistent doubts about global demand and U.S. consumer spending reports suggest a more cautious economic climate. This reinforces expectations of further rate hikes by the U.S. Federal Reserve, which could lead to lower oil demand, according to Reuters. If other OECD countries also raise interest rates, global crude consumption could decrease. Goldman Sachs recently commented that rising interest rates would continue to put a “persistent drag” on oil. In addition, data released Monday shows only modest growth in Chinese factory activity.
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“Optimism around the 12-month outlook for production waned to an eight-month low in June, as some firms expressed concerns over relatively sluggish market conditions,” analysts at S&P Global wrote in a recent report.
Russia and Saudi Arabia are weary of the emerging scenario. Both are responding by co-ordinating their oil production strategies. On Monday morning, almost simultaneously, both countries announced further reductions in their oil output. Saudi Arabia will extend its one million barrels per day (bpd) production cut into August. It added the cut could be extended even further. That will keep Saudi output at nine million barrels per day (bpd).
Just minutes after the Saudi announcement, Russian Deputy Prime Minister Alexander Novak said his country would also cut production by an additional 500,000 bpd in August. Other oil producers are also reducing their output, including Algeria, Kuwait, and the United Arab Emirates.
Oil rose modestly after the announcements, but it wasn’t enough to prompt a “material rally,” wrote analysts at Sevens Report Research.
Despite these measures, oil futures are struggling – the announcements weren’t enough to prompt a “material rally,” wrote analysts at Sevens Report Research – and price increases have been short-lived. Furthermore, U.S. oil output is also slowing down. The number of active U.S. oil rigs is at its lowest level since April 2022, suggesting a possible slowdown in production. The U.S. Energy Information Administration reports a decrease in crude oil output in April, reaching the lowest level since February.
Earlier in June, when Saudi Arabia voluntarily agreed to downsize its production targets by one million bpd for July, oil prices jumped, but the effects were not long-lasting.
The U.S. Energy Department is on a purchasing spree, buying 3.2 million barrels of oil for its Strategic Petroleum Reserves, it was announced last Friday. The administration is also expected to announce, on July 7, another solicitation for additional purchase of an unspecified amount of oil for its SPR to be delivered in October and November, the department said.
Oil producers seem in for a bumpy ride.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris.
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