OPEC, Russia and other producers agreed on Saturday to extend record output cuts of 9.7 million barrels per day (bpd) into July, curbing global supply by almost 10% amid a steep slump in demand due to the coronavirus pandemic.
For June, Saudi Arabia, Kuwait and the United Arab Emirates (UAE) had pledged to cut by 1.18 million bpd on top of that, with Riyadh forfeiting 1 million bpd.
Saudi Energy Minister Prince Abdulaziz bin Salman said that this would not continue in July, when Saudi Arabia will pump its OPEC quota, amid signs of demand recovery as nations around the world lift strict lockdown measures.
“The voluntary cut has served its purpose and we are moving on. A good chunk of what we will increase in July will go into domestic consumption,” Prince Abdulaziz told an OPEC+ virtual news conference.
Saudi crude use for power generation typically increases in the hot summer months, the minister noted.
Saudi Arabia, OPEC’s de facto leader, and Russia have to perform a balancing act as they push up oil prices to meet their budget needs while not driving them much above $50 a barrel to avoid encouraging a resurgence of rival U.S. shale production.
Producers must also weigh the recovery in global demand against a possible return of supply from Libya after months of a blockade that shut off most of its crude production as well as weak compliance with promised cuts from producers such as Iraq and Nigeria.
“The market has to absorb millions of barrels of oil that will be released from storage. As prices rise, U.S. production will continue to fall month on month due to steep base declines, but the pace of declines is set to ease markedly,” Energy Aspects analysts said in a note.
On Sunday, Saudi state oil company Saudi Aramco hiked its July selling prices for crude grades to all destinations in a move likely to discourage buying for storage but rather could help to lower inventories.
Prince Abdulaziz said the rise in Saudi crude selling prices could be seen as an indication of a return of global oil demand.
The OPEC+ supply cuts are schedule to last until April 2022 but at a lower level after July.
Russian Energy Minister Alexander Novak said on Monday that it was premature to forecast the situation in August, adding that the main precondition for any further extension of the deal would be the speed of the recovery in demand and the level of inventories.
Oil prices after early gains on Monday fell after Riyadh said it would end voluntary cuts, with Brent down 1% at less than $42 a barrel.
OPEC and its allies will now have monitoring committee meetings every month to decide on the depth of cuts after July.
Under a plan agreed in April, cuts would fall to 7.7 million bpd until the end of 2020, and then to 5.8 million bpd for a period of 16 months from January 2021 to April 2022.