Saudi, UAE and Kuwait announce extra voluntary oil production cuts

Saudi Arabia, the United Arab Emirates (UAE) and Kuwait have announced plans to voluntarily reduce their crude oil production in June 2020, on top of what has already been committed to under the April OPEC+ agreement. Saudi Arabia will cut production by an extra 1mn b/d in June; the UAE 100,000 b/d and Kuwait 80,000 b/d.

Commenting on the news, Rystad Energy’s Senior Oil Markets analyst Paola Rodriguez Masiu says: ‘The major positive outcome of these additional cuts is that, according to our calculations, we will now probably avoid global storage tank tops if demand ramps up as expected and new lockdown measures are not imposed. Before this cut, with the most recent global production shutdown data, we were approaching the maximum operating levels in July. Filling tanks above the maximum operating capacity require operators to use the contingency space, which is usually reserved for safety hazards or operational disruptions.’

‘The additional unilateral cuts by Saudi, UAE and Kuwait is not totally surprising, and could be a reflection of two things: an expectation of sub-compliance by fellow OPEC+ members (such as Iraq etc), and a reflection of the continued supply-overhang due to risk of a lackluster demand recovery.’

In Rystad’s latest estimate before the news broke, it was expecting global onshore stocks to build by 9mn and 3mn b/d during May 2020 and June 2020, respectively, pushing the limits of the available storage capacity.

‘An extra 1.2mn 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,’ continues Rodriguez. ‘If you thought that this will immediately benefit crude producers though, think again. Crude producers will have to wait a bit longer to capitalise 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 two months.’