By According to the International Energy Agency (IEA), Saudi Arabia is expected to fall behind Russia as the largest oil producer in the OPEC+ alliance. This comes as the Gulf Kingdom has significantly reduced its oil output in recent months, sacrificing market share within the organization in an effort to stabilize low oil prices that have impacted its revenue.
While these production cuts have not been adopted by other OPEC+ members or non-members, such as the United States, the IEA suggests that rival supply increases are likely to plateau soon. Simultaneously, Saudi Arabia is set to initiate a unilateral 1 million barrel per day production cut, which will extend into August. As a result, the country’s output will decline to its lowest level since 2011, reaching 9 million barrels per day and positioning it as the second-largest producer in the OPEC+ alliance, trailing behind Russia.
This strategic decision by Saudi Arabia, led by Energy Minister Abdulaziz bin Salman, aims to prioritize the kingdom’s oil revenues over market share. According to analysts, Riyadh needs oil prices of approximately $80 a barrel to maintain a balanced state budget and fund important infrastructure projects.
The tightening of the oil market, coupled with the upcoming production cuts from Saudi Arabia and a potential decline in Russian output, indicates a shifting landscape in global oil production dynamics.
Russia’s Reluctance to Cut Oil Production Shifts
Russia’s commitment to reducing its oil production has been sluggish, but recent data suggests a change is underway, according to the International Energy Agency (IEA). In June, Russian oil exports plummeted by 600,000 barrels per day to 7.3 million barrels per day, hitting its lowest level since March 2021. The IEA speculates that Russia may be opting to disregard the production cuts, maintaining steady levels of production to cater to domestic consumers while curbing exports.
Saudi Arabia Takes the Lead with Unilateral Cut
Saudi Arabia has taken a unilateral step by slashing oil production after previous collective efforts within the OPEC+ group failed to influence declining oil prices significantly. In April, the group had originally agreed to reduce output by approximately 1.6 million barrels per day, adding to the 2 million barrel cut initiated in October 2022.
Oil Output Dynamics: U.S. and Iran
While these cuts were in effect, U.S. oil output actually increased by 610,000 barrels per day. Iran, as an OPEC member, was obligated to comply with the group’s production targets but seized the opportunity to boost output by 530,000 barrels per day, as highlighted by the IEA.
Impact of Saudi Cuts and Russia’s Declining Exports
Industry analysts propose that as supply surges begin to taper off, the combination of Saudi Arabia’s production cuts and Russia’s decreasing oil exports are now yielding the desired outcome of tightening the market and bolstering oil prices. Brent crude, the international oil benchmark, has recently surpassed $80 per barrel for the first time since late April.
Balancing Supply and Demand
The IEA predicts that demand for OPEC+’s crude will surpass the group’s supply by 2 million barrels per day this month, eventually rising to 3 million barrels per day in August. Simultaneously, oil stocks are depleting, leaving only limited spare barrels to satisfy the increasing demand.
Future Outlook: Rising Demand, Insufficient Supplies
Oil demand is projected to escalate by 2.2 million barrels per day this year, reaching 102.1 million barrels per day. The following year, an additional 1.1 million barrels per day of growth is anticipated, as reported by the IEA. However, the IEA warns that available supplies will struggle to keep up with this growing demand, resulting in a significant deficit of 2 million barrels per day in the current quarter. The agency forecasts a supply increase of 1.6 million barrels per day this year, reaching 101.5 million barrels per day, followed by a further 1.2 million barrel per day increase next year.
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