Crude oil prices moved modestly higher on the morning of the 4th of July following the news that Saudi Arabia would extend its voluntary oil production cuts through August, OilPrice reported. 

Saudi Arabia is extending its unilateral 1 million bpd production cut into August, the world’s top crude exporter said on Monday, sending oil prices rising by 1%. “An official source from the Ministry of Energy announced that the Kingdom of Saudi Arabia will extend the voluntary cut of one million barrels per day, which has gone into implementation in July, for another month to include the month of August that can be extended, and in effect, the Kingdom’s production for the month of August 2023 will be approximately 9 million barrels per day,” the official Saudi Press Agency (SPA) reported on Monday.

Saudi Arabia’s extension of its 1 million b/d production into August has had little to no effect on overall oil prices, with ICE Brent settling at $74.65 per barrel at the end of the day, 35 cents lower than last Friday. All this indicates that OPEC+’s supply cuts are perceived by the market at large as a bearish signal of suppliers wary of slackening demand, rather than Riyadh cornering the physical market. The only time when Saudi Arabia was producing 9 million b/d or less on a sustainable basis was in peak COVID period in early 2021 and during the Great financial crisis of 2008. Whilst Russia refrained from additional supply cuts, it did promise to cut its crude export by 500,000 b/d, however, the current pace of loadings is already 450,000 b/d lower than May.

 Saudi Arabia’s extension of production cuts should, under normal circumstances, be a major upside for oil prices, triggering an immediate run in Brent or WTI. None of that happened this week when Riyadh announced its decision, however, with Brent finishing Monday lower than its starting point. With the eurozone’s PMI index falling to 43.4, its lowest since early Covid days, Japan plunging into contraction again and South Korea recording its twelfth consecutive manufacturing contraction, macroeconomic fears got the upper hand, again.  

The extension was not a total surprise for the market. Back in early June, the OPEC+ producers decided to keep the current cuts until the end of 2024, while OPEC’s top producer, Saudi Arabia, said it would voluntarily reduce its production by 1 million bpd in July, to around 9 million bpd. The cut could be extended beyond July, Saudi Energy Minister Prince Abdulaziz bin Salman said a month ago.

The extension is now a fact, Saudi Arabia says. “This additional voluntary cut comes to reinforce the precautionary efforts made by OPEC Plus countries with the aim of supporting the stability and balance of oil market,” the Saudis said today. Saudi Arabia has been looking to prop up oil prices for months after concerns about the global economy sent benchmark prices below $80 per barrel. That’s the level the International Monetary Fund (IMF) has estimated as the breakeven price for Saudi Arabia to balance its budget this year. Despite Saudi efforts so far, Brent oil prices have been trading below the $80 a barrel mark since the end of April. Early on Monday, after the Saudi announcement of an extension of the cuts for another month, Brent was up by 0.89% at $76.06, while the U.S. benchmark, WTI Crude, was up 0.93% at $71.30 per barrel. 

Saudi Arabia is expected to reduce the price of its crude oil going to Asia in August to reflect market movements, a Reuters survey of six Asian refining sources showed on Monday.  Saudi Aramco, the world’s top crude oil exporter, is set to reduce the official selling price (OSP) for the flagship Saudi grade, Arab Light, by around $0.50 per barrel compared to the loadings for July, according to the Reuters poll.    

Saudi Arabia typically announces on the fifth of each month the OSPs for the following month and its pricing policy is generally followed by most of the other large Middle Eastern crude oil exporters. Last month, Saudi Arabia raised the OSP for its flagship grade Arab Light for Asia for July by $0.45 per barrel to a premium of $3.00 over the Oman/Dubai average, off which Middle East crude for Asia is priced. The price for July was the highest premium against the Oman/Dubai benchmark in six months. The price hike came as a surprise to the market, which had expected a cut in prices.

For August, Asian refiners expect the Saudis to cut the OSPs for Arab Extra Light, Arab Light, and Arab Medium, while some refiners expect Arab Heavy prices to be raised, according to the Reuters poll. Last month’s unexpected price hike has reduced refining margins at the Asian refiners who now expect the Saudis to cut prices. “Saudi needs to trim prices to reflect the market movements. They have gone a bit too far from the reality in the past few months,” one respondent in the Reuters survey said. Saudi Arabia could be looking to slash crude oil shipments to the United States from next month to effect a tightening of the world’s most transparent oil market.

As the Kingdom prepares to cut unilaterally 1 million bpd from its crude oil production in July, its crude shipments to the west could be much more affected than exports to its primary market, Asia, which lacks transparent oil inventory reporting like the U.S. does, Bloomberg Opinion columnist Javier Blas argues. On several occasions in recent years, Saudi Arabia has significantly lowered crude shipments to the United States in attempts to tighten the U.S. market, which reports oil and products data on a weekly basis, unlike China and India, which rarely – if at all – report commercial or strategic oil stockpiles. 

Even after the production cut Saudi Arabia announced for July 2023, Aramco, the world’s largest crude oil exporter, reportedly assured at least five North Asian refiners they would get the full crude volumes they had asked for in July. Prioritizing supply to its prized Asian markets, Aramco could lower shipments to the U.S., to force a tightening of the market that would be evident in inventory reports. Moreover, Aramco controls the largest refinery by capacity in the U.S., Motiva, and could influence supply to the 630,000-bpd facility in Port Arthur, too, Bloomberg’s Blas notes.

Russia will cut its crude oil exports by 500,000 barrels per day in August in a bid to ensure a balanced market, Russia’s Deputy Prime Minister Alexander Novak said on Monday. “As part of the efforts to ensure a balanced market, Russia will voluntarily reduce its oil supply in August by 500,000 barrels per day by cutting its exports to global markets by that quantity,” Novak said in a brief statement.