Saudi Arabia to cut extra 1 million b/d in June

May 11, 2020
Saudi Arabia’s energy ministry has instructed national oil company Aramco to reduce its crude oil production in June by an extra 1 million b/d. The cut is in addition to the reduction committed by the Kingdom in the latest OPEC+ agreement.

Saudi Arabia’s energy ministry has instructed national oil company Aramco to reduce its crude oil production in June by an extra 1 million b/d. The cut is in addition to the reduction committed by the Kingdom in the latest OPEC+ agreement.

Under the OPEC+ deal in effect from May 1, Saudi Arabia has pledged to cut its oil production to 8.5 million b/d. With the voluntary additional reduction in June, the Saudis would produce 7.5 million b/d next month.

Meantime, Kuwait and the United Arab Emirates followed up with extra cuts of their own to support Saudi Arabia’s move. Kuwait’s oil minister said that the country will voluntarily cut crude output by an additional 80,000 b/d in June. The UAE has also committed to an additional cut of 100,000 b/d in June.

The additional unilateral cuts by Saudi, UAE, and Kuwait are not totally surprising, and reflect the continued supply-overhang due to risk of a lackluster demand recovery, Rystad Energy said.

These additional cuts aid in avoiding global storage tank top if demand ramps up as expected and new lock-down measures are not imposed. Before this cut, with the most recent global production shut-down data, the market was to approach maximum operating levels in July. Filling tanks above the maximum operating capacity requires operators to use contingency space usually reserved for safety hazards or operational disruptions.

“An extra 1.2 million b/d cut will not re-balance the market but will surely remove strain from the storage infrastructure and buy time to wait for the demand rebound,” said Paola Rodriguez Masiu, Rystad senior oil market analyst.

However, “if you thought that this will immediately benefit crude producers though, think again. 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.”