Saudi Arabia’s decision on whether it will extend its voluntary 1mn bpd production cuts will ultimately determine the short-term future of global oil prices, according to analysis from Rystad Energy’s senior vice president Jorge Leon
Production quotas for next year are set to be confirmed at the OPEC+ meeting on 26 November, with some analysts predicting that OPEC+ is likely to extend or even deepen production cuts into next year.
“Oil markets will be looking to see if Saudi Arabia extends these cuts into 2024 or if it chooses to gradually unwind them or simply let them expire at the end of this year,” says Leon. “Whichever way it goes, Saudi Arabia’s decision will have significant implications for oil markets and, in particular, for the oil price next year.”
“The kingdom is balancing the desire to keep prices high by limiting supply with the knowledge that doing so will lead to a further drop in overall market share.
Concern about demand and a possible surplus next year has pushed prices down, despite the OPEC+ cuts and conflict in the Middle East.
“Crude prices have experienced significant downward pressure in recent weeks, which could be an indicator of what is to come at the OPEC meeting, as the Saudis have repeatedly demonstrated that their price floor is above US$80 per barrel,” Leon continues.
“Our analysis shows that, in the scenario where Saudi Arabia does not extend the voluntary cuts, market bearishness will extend with the oil price averaging slightly above US$80 per barrel next year.
“On the other extreme, if Saudi Arabia extends voluntary cuts until April 2024 and then gradually unwinds them, the oil price would average US$96 per barrel in 2024.
“The latest estimate from the IMF suggests that Saudi Arabia’s oil breakeven price is US$86 per barrel.
“Our analysis suggest that Saudis will need to keep giving away market share, at least until June 2024, to achieve that price level.”