SINGAPORE: A global shortfall in crude oil supply is set to deepen in the third quarter, as the world’s top exporter Saudi Arabia pledged extra output cuts from July in a move likely to push Brent towards US$100 a barrel by the end of the year, analysts say.

Oil prices jumped more than US$1 a barrel yesterday as the Saudi energy ministry said on Sunday its output would drop to nine million barrels per day (bpd) in July from around 10 million bpd in May, the kingdom’s biggest reduction in years.

The voluntary cut pledged by Saudi Arabia is on top of a broader deal by the Organisation of the Petroleum Exporting Countries and its allies (Opec+) including Russia to extend production cuts into 2024 as the group seeks to boost flagging oil prices.

“Saudi Arabia has a track record of delivering on material cuts,” RBC Capital’s Helima Croft said in a note.

“Hence, we would expect the full one million bpd unilateral cut to hit the market in July, nearly doubling the true physical reduction we have seen from the producer group since October.”

The move has paved the way to tighter supplies and put a US$70 a barrel floor under prices, analysts said.

However, the Saudi cut is not likely to drive prices sharply higher immediately as it will take time for inventories to be drawn down.

“With Saudi Arabia protecting oil prices from sliding too low by cutting production, we think oil markets are now more prone to a shortfall later this year,” Commonwealth Bank of Australia analyst Vivek Dhar said in a note.

“We think Brent futures will rise to US$85 per barrel by the fourth quarter of 2023 even with a tepid demand recovery in China factored in.”

Goldman Sachs analysts Daan Struyven and Callum Bruce said the “moderately bullish” Opec+ meeting partly offsets some bearish risks to the bank’s December 2023 price forecast of US$95 a barrel, including stronger-than-expected supply from Russia, Iran and Venezuela, and weaker-than-expected Chinese demand.

ANZ Banking Group said the potential for a strong rally in crude prices had risen sharply as supply is expected to tighten significantly in the second half of the year if the US Federal Reserve pauses interest rate hikes and macroeconomic headwinds ease.

“Investors are likely to add bullish bets, comfortable that Saudi Arabia and Opec will provide a backstop should the market hit any hurdles,” ANZ analysts Daniel Hynes and Soni Kumari said in a note, maintaining their year-end target of US$100 a barrel for Brent.

However, price gains may be limited in the short term until there are signs of tightening in the physical market, they added.

By contrast, the United Arab Emirates was allowed to raise output targets by around 200,000 bpd to 3.22 million bpd while Russia, African and other smaller producers cut their quotas to bring them into line with their actual production levels.

“Abu Dhabi’s Adnoc’s investment in expanding spare capacity and its Murban (price) benchmark has fuelled concerns that it might eventually look to exit the producer group and fully monetise these investments,” RBC’s Croft said.

“Affording it the 200,000 bpd quota adjustment for 2024 seems to settle the issue of its Opec membership for now.”

 - Reuters