The series of oil output cuts orchestrated by Saudi Arabia since last fall may finally be having an impact on prices. Markets had largely ignored those moves, focusing instead on the shaky global economy, but this week the price of Brent crude, the international benchmark, rose above $80 a barrel for the first time since late April.
In a report published on Thursday, the International Energy Agency, the Paris-based monitoring group, said output cuts could lead to substantial deficits in global oil supplies, beginning in July, potentially pushing up prices and squeezing consumers.
“After a period of relative calm, we do expect some renewed volatility and upward pressure on prices in the coming months,” said Toril Bosoni, head of the oil market division at the International Energy Agency.
A sustained rise in prices would be a big win for the Saudi oil minister, Prince Abdulaziz bin Salman, who is chairman of the oil producers’ group known as OPEC Plus. He has waged a campaign to convince traders that Saudi Arabia and other oil producers will make whatever output cuts are needed to keep markets in balance.
In early July, Saudi Arabia said it would extend a cut of one million barrels a day, which it first announced in June, for another month, through August. Notably, Russia also said it would take 500,000 barrels of oil a day off the market in August.
Analysts said Saudi Arabia wanted relatively high prices, in the $90-a-barrel range, to fund an ambitious development program led by Crown Prince Mohammed bin Salman, the oil minister’s half brother.
Until recently, markets shrugged off the Saudi moves. Traders worried about an economic downturn, especially in China, that could sap demand for oil, as well as tensions between Riyadh and Moscow that could lead to a battle for market share like the ones that slammed oil prices in 2014 and 2020.
“There is a great deal of negativity, a diverse type of negativity, that is taking everything as a hostage,” Prince Abdulaziz said on July 5 at a conference that the Organization of the Petroleum Exporting Countries held at the opulent Hofburg Palace in Vienna.
Nevertheless, markets could be starting to turn in OPEC’s favor.
“With Brent reaching $80 this week, I think people are going to reassess their skepticism about the Saudi strategy,” said Helima Croft, head of global commodities at RBC, an investment bank.
Much depends on the economic outlook. If concerns about inflation and global growth ease, the price of oil may rise.
“I expect crude oil prices will rise sharply in the second half of this year due to solidly recovering demand in China, India, the U.S. and elsewhere, along with deep supply cuts by OPEC Plus producers, especially Saudi Arabia,” said Bob McNally, president of Rapidan Energy Group, a research firm.
There are signs that Russia is cooperating with the Saudi-led cuts. The International Energy Agency said Russian oil exports in June fell about 8 percent from a month earlier. Moscow’s revenues from these sales fell almost 50 percent from a year earlier, to $11.8 billion, the agency estimated.
Russian seaborne exports have dropped again in July to their lowest level this year, according to Viktor Katona, an analyst at Kpler, a firm that tracks these shipments.
Other factors may limit any significant rise in prices. For the first time this year, the International Energy Agency trimmed its forecast for growth in oil demand in 2023 by 220,000 barrels a day, to 2.2 million, largely because of slower-than-expected growth in China.
While global demand for oil is still expected to reach a record level of more than 102 million barrels a day in 2023, the agency forecasts that the pace of growth will halve in 2024, in part because electric vehicles help curb oil consumption.
At the same time, supplies are continuing to grow outside OPEC from countries including the United States, Brazil and Guyana, offsetting at least some of the impact of the group’s cuts.
OPEC also remains a source of potential additional oil. The new cuts will take Saudi Arabia’s production to just nine million barrels a day, the lowest in two years, the International Energy Agency estimates, trailing Russia as OPEC Plus’s top producer. The Saudis want to bring back that production as soon as possible, analysts said.