Why Oil Price Will Remain Rangebound Despite Saudi Production Cuts

Global oil markets were greeted early on Monday (July 3, 2023) by Saudi Arabia announcing a rollover of its voluntary production cut of 1 million barrels per day (bpd) to the end of August.

The cut initially offered by the Saudis unilaterally for July – at the last Organization of Petroleum Exporting Countries (OPEC) and Russia-led OPEC+ group meeting on June 4, 2023, and dubbed a “lollipop” for crude markets by the country’s Energy Minister Prince Abdulaziz bin Salman – now looks set to last for much of the U.S. summer driving season.

A statement issued by the Ministry of Energy, via the official Saudi News Agency noted: “This additional voluntary cut comes to reinforce the precautionary efforts made by OPEC+ countries with the aim of supporting the stability and balance of oil markets.”

In near tandem with the Saudi move came an overture from Russia, as it announced a “voluntarily cut” as well of 500,000 bpd for August via a reduction in cargoes designated for exports. Of course, quite like previous Russian promises of output cuts, this latest overture would again come under scrutiny from data aggregators.

It therefore remains to be seen whether Moscow will indeed go through with its pledge. But there is no disputing the fact that the latest Saudi move will keep Riyadh’s headline production around 9 million bpd, down from a pre-April production rate of 10.5 million bpd and an official output capacity of close to 12 million bpd.

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Typically, any announcement of a 1.5 million bpd cut should likely jolt the global crude market, but the latest Saudi-Russian move again failed to sufficiently move the intraday needle. European trading saw an uptick of just over 1% for Brent and West Texas Intermediate (WTI) front-month futures contracts, but by the time U.S. trading gained traction almost of the gains had been shed.

At 14:36 EDT on Monday, Brent was trading at $74.80 per barrel up 17 cents or 0.21%, while the WTI was up 16 cents or 0.23% to $70.01 per barrel. Overall, both benchmarks remain rangebound, which in the case of Brent – often deemed to be the global proxy benchmark – happens to be $71.50/$72 to $76.50/$77.

Only once these support levels (i.e., points at which the price regularly stops falling and rises back up) and resistance levels (i.e., where the price typically stops rising and slides back down) are breached can we start believing that a more deep-rooted shift is about to occur.

Such a shift is not looking likely anytime soon. Global central banks remain in hawkish mood to combat rising inflation at the expense of a wider recovery; China’s near-term economic fortunes are flattering to deceive; and U.S. consumers appear to be in a positive, but not quite exuberant mood this summer.

In fact, a peek at Brent contracts for January, February, and March 2024 – all of which are trading below the current front-month price – suggests the crude market is still in backwardation.

It means the current/front month crude price is trading higher than prices quoted in the futures market further down the line. Overall, the supply cuts simply aren’t quite cutting it just yet; and probably won’t until the macroeconomic climate becomes a bit more certain.