Riyadh

Oil prices experienced a significant boost, surging over 2 percent on Monday, following an unexpected announcement by Saudi Arabia, the world's largest oil exporter, that it would slash its production by an additional 1 million barrels per day from July onwards.

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Saudi Arabia's move is being seen as an effort to effectively countering the prevailing macroeconomic challenges that have weighed down the oil market. Following the announcement, Brent crude futures soared to $77.64 a barrel, marking a $1.51 increase. On the other hand, U.S. West Texas Intermediate crude climbed to $73.15 a barrel, representing a gain of $1.41, as per a Reuters report. 

Saudi Arabia's energy ministry announced on Sunday that the country's oil production would drop to 9 million barrels per day in July, down from around 10 million barrels per day in May. This reduction constitutes the kingdom's most substantial cut in years and adds to the broader agreement by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, to limit oil supply until 2024. The voluntary production cut by Saudi Arabia aims to combat the challenges faced by the oil market, which has been grappling with persistently low prices.

The unexpected announcement by Saudi Arabia has injected renewed optimism into the oil market.

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Analysts predict that the additional cut, combined with the existing production limitations, could create a market deficit exceeding 3 million barrels per day in July. Consequently, this deficit is expected to drive prices higher in the coming weeks. Consultancy firm Rystad Energy told Reuters that there is a potential for a tighter oil market in the second half of the year, reinforcing the positive market sentiment triggered by Saudi Arabia's decision.

The Implications of the OPEC+ Agreement

The agreement among OPEC+ nations to extend production cuts until 2024 is seen as a collective effort to bolster oil prices. However, the impact of the production cuts may be limited due to adjustments made to quotas for certain countries. Russia, Nigeria, and Angola have already lowered their targets to align with their actual production levels, potentially diluting the overall impact of the cuts. Conversely, the United Arab Emirates (UAE) has been permitted to raise its output targets by approximately 200,000 barrels per day, reaching 3.22 million barrels per day. This decision has come at the expense of African nations, which have had their unused quotas reduced under the new agreement.

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The number of operating oil rigs plummeted by 15 to a record low of 555 last week in the United States, according to the weekly report by Baker Hughes Co cited by Reuters. This decline reflects the industry's response to weaker prices, increased costs, and a shift toward prioritizing shareholder repayments over drilling activities. These factors have contributed to a slowdown in drilling operations since December.

(With inputs from Reuters)