Oil prices rose sharply early in Asian trading on Monday after Saudi Arabia announced it would cut production in July and agreed by the Organization of the Petroleum Exporting Countries (OPEC) and its allies to extend supply cuts until 2024.
At an OPEC+ meeting over the weekend, Saudi Arabia announced plans to cut production by about 1 million bpd to 9 million bpd in July, Bloomberg reported. This additional cut will join OPEC+'s 3.66 million barrels per day production cut already underway, which began in October 2022 and was extended through the end of 2024 at a meeting on Sunday.
It also agreed to reduce overall production targets by 1.4 million barrels per day starting in January 2024. However, Russia, Nigeria and Angola will account for most of these cuts to bring their production targets in line with current levels.
Such moves were taken by the oil cartel to raise the price of crude oil and support major exports. Saudi Arabia also hopes to discourage speculators from betting on falling oil prices, which have attracted significant interest this year.
Amid the news, Brent crude futures edged up 1.7% to $77.66 a barrel, while WTI futures edged up 2% to $73.17 a barrel by 8:10 pm ET. However, both contracts are still trading at 6% to 8% lower for the year.
The OPEC+ cuts come amid fears of a slowdown in economic growth and weak demand, which have pushed oil prices down this year. Crude oil has been losing value for 5 consecutive months. An unexpected production cut in April provided some support for oil prices, but the market was wary of a potential US default on debt, and weak economic performance in China raised doubts about a recovery in demand.
The upcoming cuts in the second half of 2023 could increase restrictions on the oil market and provide relative support to prices, despite deteriorating economic conditions and rising interest rates.
Several weak economic indicators from China point to an uneven recovery in the world's largest oil importer, which could cap demand by the end of the year. The eurozone and the US are also facing a slowdown in manufacturing activity this year, which is hurting economic growth. The U.S. interest rate is forecast to rise for longer, especially after non-farm wage growth in the country exceeded expectations in May.