According to the International Energy Agency (IEA), Saudi Arabia is set to fall below Russia as the largest oil producer in the OPEC+ alliance. The Gulf Kingdom, which is the de facto leader of the Organization of the Petroleum Exporting Countries (OPEC), has recently implemented significant oil production cuts in an effort to stabilize low oil prices that have negatively impacted its revenue.
Although the production cuts by Saudi Arabia have not been matched by other members of OPEC or its allies in the OPEC+ group, the increase in oil production from non-OPEC+ producers, mainly the United States, has so far undermined Saudi’s efforts.
However, the IEA predicts that the rival supply increases will soon come to a halt. Moreover, the Saudi’s unilateral decision to cut production by 1 million barrels per day, which they plan to extend into August, will result in the Kingdom’s output dropping to its lowest level in two years at 9 million barrels per day. This would make Saudi Arabia the second-largest oil producer in the OPEC+ alliance, positioned below Russia for the first time since early 2022.
It is worth noting that excluding the artificially low production levels during the Covid-19 pandemic, Saudi Arabia’s production will reach its lowest level since 2011 due to these cuts. By bearing the brunt of the supply reductions, Saudi Arabia and its energy minister Abdulaziz bin Salman have taken a bold and risky approach to support the Kingdom’s oil revenues at the expense of their market share.
In order to balance its state budget and fund large infrastructure projects, analysts estimate that Riyadh needs oil prices of around $80 a barrel. As the oil market tightens and prices potentially turn higher, it remains to be seen if Saudi Arabia’s strategy will pay off in the long run.
The Changing Dynamics of Global Oil Production
Russia, a major player in the global oil market, has finally shown signs of following through on its pledge to reduce oil production. According to the International Energy Agency (IEA), Russia’s oil exports dropped by 600,000 barrels a day in June to reach a daily output of 7.3 million barrels. This is the lowest level observed since March 2021. While Russia may be reluctant to fully comply with production cuts, it seems to be prioritizing its domestic consumers by maintaining steady production levels and reducing exports.
The move by Saudi Arabia to unilaterally cut oil production comes after previous efforts by the wider OPEC+ group failed to significantly impact falling oil prices. In April, the group agreed to slash output by approximately 1.6 million barrels a day, building on a previous cut of 2 million barrels a day in October 2022.
However, these efforts had little effect as U.S. oil production rose by 610,000 barrels a day since the implementation of the cuts. Iran, an OPEC member obliged to adhere to the group’s production targets, took advantage of the situation and increased its output by 530,000 barrels a day, according to the IEA.
Now, with supply increases likely reaching their peak, analysts believe that Saudi Arabia’s production cuts and Russia’s decline in oil exports are finally showing the desired effect of tightening the market and boosting oil prices. Brent crude, the international benchmark for oil prices, recently surpassed $80 a barrel for the first time since late April.
The IEA predicts that demand for OPEC+ crude will outstrip the group’s supply by 2 million barrels a day this month and further increase to 3 million barrels a day in August. At the same time, oil stocks are depleting, leaving limited reserves to meet the growing demand.
Oil demand is projected to grow by 2.2 million barrels a day this year, reaching a total of 102.1 million barrels a day. The IEA estimates that it will further expand by 1.1 million barrels a day next year.
Unfortunately, the available oil supplies are expected to fall behind the rising demand, resulting in a significant deficit of 2 million barrels a day in the current quarter. The IEA forecasts a supply increase of 1.6 million barrels a day this year, reaching a daily output of 101.5 million barrels, followed by another increase of 1.2 million barrels a day next year.
These changing dynamics in global oil production indicate a tightening market and the potential for higher oil prices in the future.