Energy
markets were bracing for a volatile open late Sunday, after Saudi Arabia led a
surprise oil production cut across several OPEC+ nations that will remove more
than one million barrels of oil a day from May.
In an announcement on Sunday, Saudi Arabia’s Ministry of Energy stated
that the kingdom will implement a
volunary cut of 500,000 barrles a day from
May until the end of 2023, in conjunction with other countries.
It said
that the “voluntary cut is in addition to the reduction in production” agreed
at the OPEC meeting in October and “is a precautionary measure aimed at
supporting the stability of the oil market.” OPEC+ agreed in October to cut
production by two million barrels a day from November, a move that angered the
Biden administration.
Russia’s deputy prime minister, Alexander Novak, said his country
would extend a
March production cut of 500,000 barrels a
day through the end of the year. OPEC+ is made up of members of the
Organization of the Petroleum Exporting Countries and its allies, including
Russia.
“Today, the world oil market is experiencing a period of high
volatility and unpredictability due to the ongoing banking crisis in the U.S.
and Europe, global economic uncertainty and unpredictable and shortsighted
energy policy decisions. At the same time, predictability in the global
oil market is a key element in ensuring energy security,” Novak said in a statement.
The cuts
come after a first quarter that saw a sharp decline in crude prices. Oil bulls
were disappointed that China’s lifting of strict COVID curbs didn’t provide
stronger support to prices, while aggressive tightening by central banks and
fears that banking woes in the U.S. and Europe could turn into a full-fledged
crisis stoked recession fears.
Front-month West Texas Intermediate crude for May delivery CL.1, +0.04%, which ended at $75.678 a barrel
on Friday, suffered a March loss of 1.8% and a quarterly decline of 5.7%,
according to Dow Jones Market Data. Brent crude BRN00, +0.05%, the global benchmark, fell 4.9%
in March and 7.2% in the first quarter, ending Friday at $79.77 a barrel.
Elsewhere, Kuwait’s oil
ministry said the country will cut 128,
000 barrels a day, while the United Arab Emirates said it would cut its
production by 144,000 barrels a day, according to a statement by Energy
Minister Suhail Al Mazrouei, reported by Attaqa Breaking News. Oman said it would implement a
voluntary cut of 40,000 barrels a day.
Kazakhstan said it would cut
by 78,000 barrels a day and Algeria said
it would cut by 48,000
barrels a day.
Ole
Hansen, chief commodities strategist at Saxo Bank, said the announcement “came
out of the blue.”
“Producers
were clearly frustrated by the recent slump which was speculative more than
fundamentally driven. They will likely achieve a return to the $80s while also
trying to pre-empt a smaller than expected increase in global oil demand in the
coming months. Remember most of the +2 m b/d increase expected for this year is
backloaded into the second half with plenty of room for error should economic
slowdown be as severe as currently priced in by the market through expectations
of U.S. rate cuts,” Hansen told MarketWatch.
“The
Saudi oil minister love[s] to wrong foot the market, especially when it comes
to hurting speculative short sellers,” said Hansen.
The move
also comes as the U.S., Europe and elsewhere continue to battle inflation. Oil
prices have fallen sharply over the last 12 months, after spiking to more than
$120 a barrel following Russia’s invasion of Ukraine last year. Brent was down
roughly 24% from a year earlier at Friday’s close.
The new
cuts, if fully implemented, should make for a significant draw on crude
inventories in the second quarter as opposed to previous expectations for an
early third-quarter draw, said Giacomo Romeo, energy equity analyst at
Jefferies, in a note.
“The only
potential downside to this decision is that bears in the market could perceive
the cut as a validation of the recent demand concerns,” he wrote, noting that
compliance with past targets has also been in issue.
The
U.A.E., for example, was seen producing around 200,000 barrels a day above its
target for a few months, while Russian output in March didn’t see the full
500,000 barrel-a-day reduction announced in February, Romeo noted.