Saudi Arabia’s push for a layered production agreement this weekend, combining an immediate voluntary cut with renegotiated Opec-plus production quotas, is a complex move aimed at supporting oil markets over the short, medium and long term.

The kingdom's additional 1 million barrel per day production cut for July — and potentially beyond that — is intended as a precautionary measure amid negative market sentiment, but might put Riyadh in the uncomfortable position of ceding market share in the near term to other producers.

Sources tell Energy Intelligence it’s a trade-off that Riyadh is willing to make to try to regain control of a market that it sees as largely detached from underlying supply-demand fundamentals.

Crude prices moved only slightly higher on Monday in response to the Opec-plus meeting.

Details Emerge

Saudi Energy Minister Prince Abdulaziz bin Salman has emphasized the surprise factor in his recent strategy to counter speculation in financial markets that he believes is a root cause of the market's malaise, while creating a disconnect between fundamentals and sentiment.

Energy Intelligence understands that Saudi officials did not mention their intent to offer an additional voluntary cut during negotiations on new quota baselines with African member states, or during talks with delegations to extend existing voluntary cuts through 2024.

Similarly, there were no negotiations between Saudi Arabia and fellow Opec-plus heavyweights Russia and the United Arab Emirates over contributing additional voluntary cuts, delegates tell Energy Intelligence.

After securing an agreement on the baseline revisions, Prince Abdulaziz instead surprised officials with the news that Riyadh would offer an additional cut during deliberations on the sidelines ahead of the closed-session Opec-plus meeting, according to delegates.

Some analysts, however, said his warning to speculators to “watch out” in late May had blunted the potential of any cut to give a jolt to market players. “There was at least a portion of the market that was positioning for a cut,” said Rory Johnston, founder of data consultancy Commodity Context.

By contrast, negotiations on baselines with African producers whose production has lagged their quotas for a number of years were intense. Those delegations — particularly Nigeria and Angola — pushed back against the pressure to lower their quotas after years of underproduction.

Many of the African ministers needed to make calls to their governments to get approval for the changes. In the end, these were accepted on the basis that independent agencies would reassess the production capabilities of the African states, including Nigeria, Angola and Gabon, at the end of this year before implementing the proposed 2024 quota cuts.

In total, eight states that have been underperforming their targets will get downward adjustments of a combined 622,000 b/d. Nigeria sees the biggest drop, with a baseline that’s 362,000 b/d lower, followed by Angola with a 175,000 b/d decrease.

Nigeria — whose newly sworn-in president, Bolu Tinubu, has pledged to revitalize the country’s energy industry — issued a press release the next day outlining the country’s hopes to secure a larger future quota.

Acting Alone

At face value, Saudi Arabia's unilateral cut might appear to run counter to the country’s previous Opec-plus strategy.

The kingdom has often argued that managing the market must be a shared responsibility, rather than Saudi Arabia’s burden alone, and in the past it has said it should not have to cut to make room for higher-cost barrels in the market.

But sources said Saudi Arabia sees greater value in supporting prices in the near-term and having greater control over supply ahead of an expected acceleration of demand growth in China in the second half of this year.

Energy Intelligence also understands that the cut is intended as an incentive for others to step up compliance and a move to help speed up the recovery of the market, and does not signal a break from collective responsibility.

Macro Uncertainty

Oil markets have been driven by macroeconomic sentiment more than fundamentals in the past few months.

April's agreement to introduce voluntary cuts saw prices rise only briefly before heading down again, and markets showed continued weakness in the run-up to this weekend's meeting.

It's not the first time Saudi Arabia has been willing to cut on its own. In 2021, Saudi Arabia offered additional voluntary cuts of 1 million b/d to tighten oil markets that had been battered by pandemic lockdowns, in a bid to accelerate the restoration of balance between supply and demand.

The latest Saudi move should further tighten fundamentals, deepening the impact of the earlier voluntary 1.66 million b/d reduction in output, which took effect in May.

Energy Intelligence balances suggest that without the additional Saudi output cut, the oil market would show a 350,000 b/d supply deficit for the full year after a 600,000 b/d surplus in the first half.

The additional Saudi cut would add close to 100,000 b/d to the full-year deficit for each month it remains in place.

However, such forecasts assume strong demand growth, all of which is backloaded in the second half of the year — making markets vulnerable if demand falls short of that assumption.

Should strong Chinese demand fail to materialize, Saudi Arabia could face a difficult decision on whether to support the market with cuts that could further undermine its market share, analysts say.

In the near term, the market will focus on the duration of Saudi Arabia’s 1 million b/d cut, Johnston said, leaving traders to parse every cryptic comment from Prince Abdulaziz.

UAE Wins Larger Quota

The UAE was one winner of the weekend’s events, as the only country to receive an increased production quota.

Its 200,000 b/d quota boost marks the UAE’s second such increase in the last couple of years, as the country has pressed to be allowed to make greater use of its expanding production capacity.

Its 2024 quota will rise to 3.219 million b/d, compared with production capacity of nearly 4.3 million b/d, according to Energy Intelligence estimates.

Current quotas for Republic of Congo, Angola and Nigeria are provisional pending the assessment of their production capacity.

Analysts at investment bank Jefferies noted the changes “will result in an actual increase of supply because the UAE can easily deliver the higher output while the others were already producing below target.”

But the actual market impact of the quota changes will not be apparent until 2024, when they take effect.