Crude oil prices to remain weak despite production cuts by Saudi: Analysts

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Crude oil prices are expected to remain weak in June despite production cuts by Saudi Arabia, according to energy experts.

This comes after the Organisation of the Petroleum Exporting Countries and its allies (OPEC+) member country Saudi Arabia announced on June 4 a cut in oil production of another one million barrels per day (bpd) starting in July. However, other OPEC+ countries, including Russia, have not announced further cuts.

On the development, Deepak Jasani, Head of Retail Research, HDFC Securities, said, "Prices will not rise majorly. There may be an upward momentum in immediate reaction, but prices are expected to remain weak in June amid low demand."

Crude oil prices traded around $75 per barrel in May due to demand weakness and recession worries. In April, OPEC+ announced a further supply cut of around 1.16 million bpd for 2023 to put pressure on oil prices.

OPEC had agreed to cut production by two million bpd from November 2022 until the end of 2023, despite calls for pumping more oil by the US government.

In April, Saudi Arabia decided to reduce supply by 500,000 bpd, while Iraq announced a cut of over 200,000 bpd starting from May 2023 until the end of the year. Russia said it will continue the production cut it announced earlier until the end of 2023. The country announced a production cut of 500,000 bpd in February.

Analysts said oil prices may rise immediately but would ultimately settle down amid demand worries, similar to when OPEC+ announced cuts in April.

Probal Sen, Energy Analyst, ICICI Securities, said, "Post the immediate reaction, my sense is that the signal this sends to global markets is that demand remains weak and no one else is willing to cut output. So, I think, the medium-term reaction will remain bearish."

Weak demand weighed on prices in May

Crude oil prices, which touched an all-time high of $140 per barrel in March 2022, were trading around $75 per barrel in the month of May this year.

Analysts said weak demand in China despite the reopening of the largest oil consumer in the world and recession worries in European countries dragged down prices in May.

Prashant Vasisht, VP and Co-head of Corporate Ratings, ICRA, said, "Muted driving season in America, weaker-than-expected demand from China, and several countries in Europe staring at recession were the major factors for weak prices in May."

"In Europe, countries such as Germany are already in recession, and there is a high probability that the US may also enter recession by the end of this year. This has led to weakness in crude oil prices," Vasisht added.

Crude oil prices rose 2 percent to $77 per barrel on June 5.