Saudi Oil Outputs to Hit Pump Prices?

Saudi Arabia recently announced its plan to cut oil production by one million barrels per day from next month, with potential further cuts to follow later this year. This follows two previous cuts by OPEC+ members, signalling a further pullback in production levels that is expected to last until 2025 at the very least.

Here, we’ll analyse the rationale behind the move, some potential implications for global markets, the wider global crude situation, what the situation could mean for the price of oil, as well as providing incisive market analysis from our global investment experts.

Global glut weighs on prices 

To gain some perspective, we must take a look back: this time last year, crude was trading at near post-pandemic highs of over $120 per barrel; however, by contrast, this month we have seen barrels trade just above the $67 mark.

Such a depression in prices has been precipitated by lower global demand in comparison with the levels seen before the global covid crisis. As crude outputs have remained relatively high, this slump in demand is beginning to hit oil-producing countries that are looking to maintain current price levels in line with extraction outputs.

As a result, OPEC+ countries, including Saudi Arabia, have also agreed to maintain a reduction in production levels until the end of next year, to the tune of  an extra 1.4 million barrels per day, meaning that this situation will continue to affect markets until at least January 2025.

Previous cuts to oil prices due to oversupply have so far helped to shield consumers from further inflationary pressures, especially in the US. However, this latest slowdown in production is likely to lead to a rise in petrol prices at the pump for individuals and businesses alike as the scarcity begins to take hold. Sectors which are most likely to be hit by an increase in price include transportation, logistics and manufacturing, leading to higher costs to the end-user in economies already struggling to contain inflation.

Potential drawdown in international markets?

Any hike in oil prices is likely to have a ripple effect through highly correlated markets around the world. One of the most important considerations for us will be the possible impact on equity indices, including in the Eurozone, US and emerging market economies. 

Although an increase will likely see US indices being weighed down temporarily, it is thought that any risks in the more medium term could be offset by increasing imports from the US’s major oil import partner, Canada, which supplies more than 50% of the US’s crude currently, compared to the 7% supplied by Saudi Arabia. However, after the last rebalancing, our portfolios now have less exposure to US equities. 

In particular, we expect to see the burden of crude price hikes in sectors such as technology, telecommunications and luxury goods as consumers look to cut overall expenditure in response to higher essential day-to-day purchase prices such as petrol. 

Airlines, too, will be hit by any extra costs in the face of lower demand as people struggle with the cost of living crisis and consequently cut back on flights abroad. Any further pressures on the industry could see equities drop after data releases

Where from here? 

While Saudi Arabia’s 1m barrels per day decrease in production may be the headline here, we must also take the global context into account. The United Arab Emirates, for example, has raised its output targets over the same period, while other members, such as Nigeria and Russia, have in fact lowered their targets to meet expectations.

It’s also worth bearing in mind that OPEC+ production levels are often not in line with the previously stated extraction targets of its members and, therefore, are not to be seen as absolute in terms of actual outputs.That being said, the group is responsible for 40% of global crude extraction and so any major decrease across the 13-strong group could greatly affect markets in the near term. 

As always, our Asset Allocation team will continue to closely monitor this developing situation and its potential impacts on markets, so that we can tailor our portfolios for maximum efficiency, mitigating risk while not sacrificing potential returns.