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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Saudi Arabia’s Oil Production Cuts Isn’t Enough To Shake Bearish Sentiment

  • Saudi Arabia extended its 1 million bpd extra oil output cut for another month.
  • Oil has reacted slightly positive to this development.
  • On Tuesday, Morgan Stanley lowered its oil price forecast and predicted an oil surplus during the first half of 2024.
Riyadh

Leading OPEC producer, Saudi Arabia, has extended its voluntary 1M bbl/day oil production cut for another month, till August. The reduction will take the country's production to ~9M bbl/day, the lowest level in several years. Saudi has been single-handedly sacrificing sales volume in a bid to goose weak oil prices, but has so far reaped little reward

Nevertheless, oil markets have reacted positively to the development, with oil prices rallying for the second day running: WTI price climbed 3.2% to trade at $72.01 per barrel in Wednesday's intraday session at 1235 hrs ET while Brent was up 0.7% to change hands at $76.77 per barrel.  

Unfortunately, oil traders remain unconvinced, with Marwan Younes, chief investment officer of hedge fund Massar Capital Management, saying the gains are likely to be short-lived.

"The problem is when you cut production in an already weak environment, the impact is limited. It looks like we could be here for a while," Ole Hansen, head of commodity strategy at Saxo Bank, has told the Wall Street Journal.

On Tuesday, Morgan Stanley lowered its oil price forecast and predicted an oil surplus during the first half of 2024, thanks to non-OPEC supply growing faster than demand. MS has lowered its Brent price outlook for Q3 2023 to $75 from $77.50 per barrel and cut Q4 2023 forecast to $70 from $75. The Wall Street bank has also cut its oil price forecast for 2024 by $5, and now sees prices at $70 in Q1 2024; $72.50 in Q2 2024, $75 in Q3 2024 and $80 for the final quarter.

Related: TotalEnergies CEO: Oil Companies Should Set Carbon Targets At Upcoming COP28

"Despite low investment, non-OPEC+ supply has been growing robustly and supply from Iran and Venezuela has been creeping higher. We still model stock draws in Q3, but expect oil price softness to continue as the market's focus shifts to H1 2024 when balances look in surplus," the bank said in a note.

But the bulls refuse to be silenced by the bears, with some bulls still seeing a significant upside in oil prices. On Tuesday, TD Securities said that oil prices can still rally over the next six months regardless of ongoing demand fears as well as growing supply from the likes of Venezuela, Iran, and even Russia

"We do expect crude to rebound in the second half of the year. We think approaching $90 is probably not unreasonable in the next six months or so as the worst of the fears about a recession moderate. When we look at demand growth for 2023, we're still looking north of two million barrels per day, and we continue to expect OPEC plus to be fairly well-disciplined on the supply side," Bart Melek, Global Head of Commodity Strategy at TD Securities stated in a recent investor note.

Oil prices kicked off the second half of the year, trading around the $71 per barrel level, and have steadily traded below their 100-day moving average since the end of April. Oil prices have declined nearly 12% in the year-to-date.

Saudi Determined To Keep Oil Prices High

The bulls can also count on Saudi Arabia and OPEC to maintain tight production discipline, with members hell-bent on maintaining relatively high oil prices after enjoying rare budget surpluses in 2022.

Last year, Saudi Arabia recorded a budget surplus, the first time it did so in nearly 10 years, thanks to high oil prices boosting its coffers.

According to the Kingdom's finance ministry, releasing what it said were preliminary estimates, the country's 2022 surplus clocked in at 102 billion riyals ($27 billion), good for 2.6% of its gross domestic product (GDP). Total revenue for this year was estimated at 1.234 trillion riyals, while spending amounted to 1.132 trillion riyals.

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The Saudi government approved a 1.114 trillion riyal budget for 2023 and expects to still record a surplus of 16 billion riyals for the year. Although that will mark a significant reduction from this year's surplus, amounting to just 0.4% of GDP, it's a surplus nonetheless and is based on an oil price considerably lower than what many experts have projected for 2023.

The petrodollar windfall has really given a boost to battered Gulf economies, allowing some Gulf Arab states to pay down debt and others to diversify their oil-reliant economies in very big ways.

According to Reuters, all the six Gulf Arab states--Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Bahrain, and Oman--posted budget surpluses, many for the first time in a decade thanks to buoyant oil prices and years of fiscal reforms.

Alex Kimani for Oilprice.com

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