DTN Oil

WASHINGTON, D.C. (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange powered higher in Thursday's afternoon session, sending the international crude benchmark above $85 bbl after Saudi Arabia announced a one-month extension of a unilateral 1 million bpd reduction in production, while hinting it could further deepen its crude output cut in coming months to support the global market balance.

While the decision to extend the 1 million bpd production cut for a third month into September was fully expected and priced-in by the market, the hint at "deeper cuts" in the official statement from the Saudi Energy Ministry published on Saudi Press Agency has caught markets off guard, rallying oil prices back to near their three-month highs.

The latest announced production cut by the Saudis comes atop of voluntary curbs of 500,000 bpd previously announced by the Kingdom in April, which are now extended until the end of December 2024. In effect, Saudi oil production for the month of September will be 9 million bpd -- their lowest output rate since 2012 outside of the pandemic.

Riyadh had previously asserted its commitment to doing what's necessary in the interest of "market stability." Others might argue the production cuts are designed to push oil prices higher, with the possibility of a deeper reduction in output stoking concern over lower supply availability that would further tighten the physical oil market in the final months of the year.

"[T]his 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," stated Saudi Arabia's Ministry of Energy on Thursday, according to the Saudi Press Agency.

Russian Energy Minister Alexander Novak said on Thursday that Moscow would taper its 500,000-bpd export cut in effect in August to 300,000 bpd in September. Novak's statement was, however, vague on details, specifically around which export level the cut would be based on, and the possible effect on Russian oil production. Russian waterborne crude exports in June fell by 465,000 bpd from a record-high 3.9 million bpd seen in May, according to vessel-tracking data. Russian then cut its oil exports by another 500,000 bpd from July, which sent its waterborne exports from Western ports to multi-month lows.

The announcements come ahead of Friday's (8/4) OPEC+ Joint Ministerial Monitoring Committee meeting among the 23-member producer coalition, chaired by Saudi Arabia and Russia, with speculation growing that additional cuts could be on the table.

Saudi Arabia and Russia, OPEC+'s largest oil producers, have rapidly cut back on crude exports to key markets in Asia and Europe as part of their efforts to tighten the global oil market. This, in turn, created demand pull for oil barrels outside the OPEC+ coalition, mainly from the United States and North Sea, pressuring their domestic inventory levels.

U.S. Energy Information Administration reported on Wednesday commercial crude oil inventories were drawn down by a record 17.05 million bbl over the seven days ending on July 28, extending a destocking pattern into a third straight week. The outsized drawdown was largely driven by a surge in oil exports that spiked above 5 million bpd in the reviewed week, up 692,000 bpd or 15% from the third week of July. According to EIA's calculations, the global oil market will see sustained inventory drawdowns through the end of the year, putting upward pressure on oil prices, before stockpiles will again transition to builds in 2024.

At settlement, West Texas Intermediate September futures on NYMEX jumped $2.06 bbl to $81.55 bbl, and the international crude benchmark Brent contract for October delivery advanced $1.94 to settle at $85.14 bbl. NYMEX September RBOB futures moved $0.0111 lower to settle at $2.7647 gallon, while the September ULSD contract on NYMEX advanced $0.0706 to the highest settlement since Jan. 31 at $3.0706 gallon.

Liubov Georges can be reached at Liubov.Georges@dtn.com