Saudi Arabia’s Oil Production Cut May Not Lead to Sustainable Price Increase: Citi Analysts

Analysts at the “Citi” banking group ruled out, on Tuesday, that Saudi Arabia’s pledge to further reduce its crude production would lead to a sustainable increase in prices to reach a range between 80 and 90 dollars a barrel, even as other banks expected an exacerbation of the global shortage in supplies in the second half.

Indeed, Citi analysts have indicated that prices could fall this year and next due to factors including weak demand, rising supplies from outside the Organization of the Petroleum Exporting Countries (OPEC) by the end of the year, potential recession in the United States and Europe and slower growth in China.

“The likelihood that Saudi Arabia will deal with this matter on its own and permanently is extremely low,” Citi’s memo said.

Citi analysts expect Brent crude to move in a limited range, averaging $81 a barrel this year.

Oil prices fell, on Tuesday, and Brent crude recorded about $ 75 a barrel, as concerns about global economic growth led to lower prices after Saudi Arabia announced a production cut.

“Rough calculations show that Saudi Arabia needs a $10 increase in the price of crude oil in order for its decision to cut a million barrels not to affect its revenues,” said Ole Hansen, strategist at Saxo Bank.

Hansen added that the main driver of oil prices at the moment continues to be concerns about global growth and demand, not only in China but also in the United States and other major consumers.

HSBC also kept its Brent price forecast at $93.5 a barrel for the second half of this year, expecting the negative macroeconomic factors to remove some of the support provided by the cuts.

However, UBS and Barclays banks were slightly more optimistic. UBS analysts expected Brent crude prices to reach $95 a barrel by the end of 2023, with the supply deficit expected to exceed two million barrels per day.

They added that a “significant deficit” in the market is expected to continue after the broader OPEC+ alliance agreed to extend voluntary cuts until the end of 2024.

Barclays expected that the voluntary reduction by Saudi Arabia would lead to a slight increase in the deficit in the second half of the year.

Other analysts say the global supply shortage could worsen in the third quarter after production cut announcements and push Brent prices to $100 a barrel by the end of the year.