Despite the efforts of OPEC+ to bolster crude prices through production cuts, their success has been limited over the past two months. The alliance, consisting of 23 nations, initially announced a significant reduction of 1.7 million barrels per day in April, in addition to a prior commitment in October to decrease production by 2 million barrels daily. However, the impact of these measures proved short-lived, as crude prices experienced a mere two weeks of rise following the April cut, followed by a subsequent four-week decline that erased approximately 15% of their value. Similarly, the previous pledge to cut 2 million barrels fared even worse, resulting in only a few days of price gains before plunging to 15-month lows in March.

On Sunday Saudi Arabia committed to implement additional production cuts starting in July with the price of crude oil rebounding strongly on Monday in response. The Kingdom announced that its output would be reduced to 9 million barrels per day, representing a decrease of approximately 1 million barrels compared to May’s production levels. The possibility of extending these cuts further was also mentioned by the Saudi energy minister. Concurrently, the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, agreed during a weekend meeting to lower their overall production targets by 1.4 million barrels per day, effective from January 2024.

These measures aim to provide further support to oil prices, which have experienced a decline in recent months due to concerns surrounding global economic growth and sluggish demand. However, it is unlikely that the Saudi supply cuts alone will result in a sustained increase in prices, in the short-term. This is attributed to weaker demand, stronger non-OPEC supply, slower economic growth in China, and potential recessions in the United States and Europe.

Also, Saudi Arabia increased the official selling price of its crude to Asian buyers. However, this decision has led Asian refiners to seek more affordable alternatives from West Africa, Russia, and Iran. Saudi Arabia’s recent surprising actions have yet to yield the desired outcome, as oil prices quickly retreated to their pre-OPEC+ meeting levels within a single trading day.

The United States foresees a slower rate of oil consumption growth in 2023, approximately half the rate observed in 2022, largely due to declining diesel usage, as stated in a government report. Additionally, trade data from China released on Wednesday reflected weakened global demand.

Source: Tradingview

From the onset of this year, oil prices have experienced a decline of around 10%, mainly influenced by a sluggish recovery in China and the Federal Reserve’s aggressive monetary policies that have weighed on demand. According to official data released on Wednesday, Chinese exports experienced a decline for the first time in three months in May. While this may be partly influenced by the comparison to a year ago, it also signifies weaker global demand.

While oil traders displayed minimal concern regarding Saudi Arabia’s production cuts, the International Energy Agency (IEA) has cautioned that higher prices are anticipated in the near future, with intensified stock draws projected for the second half of 2023.

Overall, over the past three months crude prices have been fluctuating in a wide range between $63.64 and $81.28. While the latest output cut could boost the price towards the $80.00 mark, a sustained move above these levels is unlikely in the short-term. Further consolidation in the next few months is likely to be seen, with a gradual recovery towards $90 in the last quarter of 2023.

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