VIENNA—Saudi Arabia over the weekend slashed 10% of the kingdom’s oil output to boost prices, and the returns so far suggest it could be a costly bet.
After warning speculators that OPEC+ could cut oil production again, Saudi Energy Minister
Prince Abdulaziz bin Salman
announced Sunday that the world’s biggest crude exporter would reduce 1 million barrels of its own output in July after other cartel members refused to join the effort. The Organization of the Petroleum Exporting Countries and its Russia-led allies account for close to half of the world’s oil production. An output cut was expected to prop up prices amid concerns about a slowing global economy crimping energy demand.
On Monday, oil prices opened sharply higher but gave up most of those gains. Brent crude, the international oil benchmark, rose 0.8% to settle at $76.71 a barrel. Oil prices remain about 18% lower than they were when OPEC+ first jolted the market in October with output cuts, which some members, including Saudi Arabia and Russia, expanded in April.
Saudi officials familiar with the matter acknowledged that Monday’s increase in oil prices was less than expected by Abdulaziz, who privately defended the move to cut output and push back against short sellers after the contentious meeting, they said.
In recent months, Abdulaziz has been fixated on Wall Street short sellers whose bets can cause prices to fall. Late last month, he warned them to “watch out,” which some analysts saw as an indication that OPEC+ might reduce output at the June 4 meeting.
The cut, which Abdulaziz said was extendible, will take Saudi Arabia’s output to 9 million barrels a day, a level that is the lowest since June 2021 and rarely seen in the past 10 years, which suggests Riyadh is willing to sacrifice market share to prop up prices. That could come at a steep cost, as the oil price rise so far won’t compensate for the loss of revenue caused by the drop in output, said the officials familiar with the matter.
Saudi Arabia also faces the prospect of losing more market share in key markets such as China to the United Arab Emirates and Russia, which continues to pump large volumes of cheaper crude into the market despite promising not to. Both the U.A.E. and Russia pushed back against more cuts saying they were comfortable with current prices, OPEC delegates said Sunday.
OPEC+ members often cheat on their production quotas, data has shown in the past. Some African states, who were forced Sunday to give up some of their allocated quotas for next year, told colleagues that they didn’t plan to stick to those limits, delegates said.
Monday’s price response was underwhelming in part because a one-month output cut doesn’t resolve various uncertainties that have weighed on the market, according to David Fyfe, chief economist at commodities-data firm Argus Media. Another reason is that Saudi Arabia went it alone with the extra cut, Fyfe said, leading to a perception in the market that Riyadh probably had tried and failed to shepherd other members of the cartel into a broader curtailment.
“The danger is, if we have a steeper and longer than expected Atlantic Basin recession, how quickly will OPEC be able to react given this time around there seems to be a little bit of an argument about concerted cuts in the second half of the year,” Fyfe said. “The demand-side issues haven’t gone away,” he added, pointing to weak activity in Chinese manufacturing and real estate, both big consumers of diesel.
In another surprise move, Saudi Aramco on Monday raised its crude prices for July. Analysts and traders had expected the state-owned oil giant to lower its official selling prices to compete with cheaper options such as Russian crude in the market amid a modest demand outlook.
The focus on keeping oil prices higher underscores the pressure facing the first Saudi prince to run the oil ministry. As his half-brother, Crown Prince Mohammed bin Salman, pursues his ambitious plans to reshape the kingdom’s oil-dependent economy, Abdulaziz must keep crude prices at a level that will make those efforts economically feasible.
Saudi Energy Minister Prince Abdulaziz bin Salman has been fixated on Wall Street short sellers whose bets can cause prices to fall.
Photo: LEONHARD FOEGER/REUTERS
Analysts estimate the kingdom needs oil prices above $80 a barrel to balance its expansionary budget.
Saudi Arabia would likely extend the cuts if Brent oil prices remain stuck between $70-$75 a barrel and deepen them if prices fall below $70 a barrel, says Commonwealth Bank Australia. Goldman Sachs says that for every month the cuts are in place, it expects an extra $1 a barrel on oil prices.
The Saudi cut will sharply add to expectations of a market deficit. The International Energy Agency was already expecting a 1.9 million barrel a day deficit by the third quarter. That deficit could now reach 3 million barrels a day after the Saudi cuts, says Rystad Energy.
That should at the least keep the recent slide in oil prices from deepening, analysts agree, but there is less consensus on whether prices will rise.
“This is a challenging market for OPEC+ and the Saudis to try and manage,” said
Richard Bronze,
head of geopolitics at consulting firm Energy Aspects. “A lot of that is down to factors beyond their control, such as the macroeconomic outlook.”
“So I certainly don’t think they’re having as much success and as much influence as you could say they did in 2021, early 2022,” Bronze added.
—Will Horner, Anna Hirtenstein and Joe Wallace contributed to this article.
Write to Summer Said at summer.said@wsj.com