Commodities Market Reacts to Saudi Cuts and Market Uncertainty

The Commodities Feed: Further Saudi cuts

The oil market initially moved higher after Saudi Arabia announced a rollover of its additional supply cuts into August. However, the market failed to hold onto its gains with these cuts already largely expected.

 

Energy - Further oil supply cuts

It was not too surprising that Saudi Arabia decided to roll over its additional voluntary cuts of 1MMbbls/d from July into August.  The market was largely expecting it, particularly in an environment rife with negative sentiment. However, what was more surprising was Russia announcing that they would reduce exports by 500Mbbls/d in August and also aim to reduce output by the same amount. Furthermore, Algeria will also make a further cut of 20Mbbls/d in August. The market initially reacted positively to the news, however, the gains were short-lived with Brent settling a little over 1% lower on the day. As mentioned, the Saudi cut was largely expected, and in fact, failing to roll over the cut would have put further downward pressure on the market. This leaves the Saudis in a difficult spot for the next few months, as they will have to be careful how they wind down this supply cut in the current environment. Although the Russian announcement was a surprise, there will be doubts within the market over whether Russia will actually make the cuts or not. Their track record this year has not been great. Russia supposedly cut supply by 500Mbbls/d earlier in the year. Yet seaborne crude oil exports from Russia have been above pre-war levels for much of this year.

The price action yesterday is also a good illustration of what is driving oil prices at the moment. Fundamentals are not having as much influence on price direction as one would expect. Instead, the uncertain macro outlook is what the market is focused on. And it is difficult seeing this pattern changing significantly in the short term, though the additional cuts do put a stronger floor in place for Brent at around US$70/bbl. Therefore, we can expect the rangebound trading that we have become accustomed to will continue in the short term.