Business/economics

Saudi Arabia, Kuwait, and UAE Aramco Will Cut Close to Additional 1.2 Million B/D from June Oil Output

The latest cuts come less than 2 weeks after OPEC+ began the largest round of coordinated production curtailments ever agreed to.

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Saudi Arabia has directed its national oil company, Aramco, to cut its crude oil production for June by an extra 1 million B/D, on top of the reduction already committed by the kingdom under the OPEC+ cut deal, according to a Saudi energy ministry official.

“The Kingdom aims through this additional cut to encourage OPEC+ participants, as well as other producing countries, to comply with the production cuts they have committed to, and to provide additional voluntary cuts, in an effort to support the stability of global oil markets,” the Saudi official said.

The Saudi announcement was closely followed by similar announcements from the UAE and Kuwait that those countries would cut an additional 100,000 B/D and 80,000 B/D, respectively, all in an effort to help rebalance supply and demand in light of the COVID-19 pandemic. 

Global oil demand has slumped by about 30% as the coronavirus pandemic has curtailed movement across the world. OPEC and allies led by Russia, a group known as OPEC+, agreed in April to reduce output by a record 9.7 million B/D for May and June. Under the agreement, Saudi Arabia’s targeted oil production for those 2 months was 8.492 million B/D. The kingdom’s production for June, after both its targeted and voluntary cuts, will now be 7.492 million B/D.

Commenting on the cuts, Rystad’s Senior Oil Markets Analyst, Paola Rodriguez Masiu, said, “The major positive outcome of these additional cuts is that, according to our calculations, the industry will now probably avoid global storage tank tops if demand ramps up as expected and new lockdown measures are not imposed.”

Filling tanks above the maximum operating capacity require operators to use contingency space, which is usually reserved for safety hazards or operational disruptions. Before this cut, with the most recent global production shutdown data, the industry was approaching the maximum operating levels in July, according to Rystad.

An extra 1.2 million B/D cut will not rebalance the market but will surely remove strain from the storage infrastructure and buy time to wait for the demand rebound, said the energy analytics firm. Producers will slowly relax curbs after June, although reductions in supply will stay in place until April 2022.

“If you thought this would immediately benefit crude producers, think again,” said Rystad. “Crude producers will have to wait a bit longer to capitalize from the coming uptick in products demand. It should not be expected that crude intake will immediately rebound as much as demand because refiners are likely to first draw products out of inventory that have been accumulating over the last 2 months.”

Brent crude was up 19 cents, or almost 1%, at $31.16 a barrel at 1216 GMT on 11 May, while US West Texas Intermediate crude rose 38 cents, or 1.5%, to $25.12. Both contracts had fallen more than $1.00 earlier in the session.