By Dmitry Zhdannikov
LONDON (Reuters) - Saudi Arabia has crafted a complex OPEC+ deal with a view to punishing investors that have bet on falling oil prices but could inadvertently lend long-term support to the rival U.S. energy industry, OPEC+ insiders and market watchers said.
On Sunday, Saudi Arabia pledged to cut its oil output by 1 million barrels per day (bpd), or 10%, in July on top of existing output cuts from OPEC and its allies. With the new Saudi reduction, the group has agreed to take some 4.6 million bpd off the market in July, equivalent to 4.6% of global demand of 100 million bpd.
OPEC+ also agreed on Sunday to extend the group's existing supply cuts of 3.66 million bpd into 2024.
In response, oil prices rose nearly $2 a barrel early on Monday to $78 per barrel [O/R]. Analysts said the gains are only the beginning and the cuts will steadily deepen a global supply shortfall that could push prices towards $100 a barrel.
"This market needs stabilisation," Saudi Energy Minister Prince Abdulaziz bin Salman said on Sunday, calling his surprise decision to deepen Saudi production cuts "the icing on the cake" for the deal.
Prince Abdulaziz has repeatedly expressed anger and pledged to punish short-sellers of oil that bet on price falls. Prices had fallen in recent weeks to close to $70 per barrel from over $130 a year ago when Russia invaded Ukraine.
"The Saudi move was driven by the desire to deter short-sellers from pushing the price any lower," a source familiar with OPEC+ strategy said on condition of anonymity.
"The size of (the Saudi) reduction is credible and should at minimum limit the downside pressure on prices for the rest of the year," Natasha Kaneva at JP Morgan said. Unexpected price rises force short-sellers to close positions at a loss.
OPEC says it does not have any oil price target and its policy decisions are to prevent volatility by balancing supply and and demand.
"(The cut) clearly reflects the angst and frustration amongst producers, particularly of Saudi Arabia, of sliding prices," Tamas Varga from PVM brokerage said, adding that Riyadh needs prices of $80 per barrel to balance its budget, according to the IMF estimates.
Previous cuts by the group have triggered heavy criticism from the United States and other consuming nations that have accused it undermining the global economy by driving energy costs higher.
OPEC+ ministers have responded by saying they are defending their own interests and that they need to provide conditions for long-term investment in the oil and gas sector.
They also say piecemeal policies to shift to low carbon energy have discouraged investment and could lead to shortages in future supply before the world is ready to live without oil.
U.S. OIL BOOM
The United States was sanguine about the latest OPEC cuts. A White House official said on Sunday that the administration's focus was "not barrels" but prices for U.S. customers and that they had fallen significantly since last year.
So far this year, a weakening global economy, concern about the U.S. banking crisis, and a slow Chinese recovery from COVID-19 restrictions have capped oil prices.
But OPEC, as well as the West's energy watchdog the International Energy Agency and many observers expect rising demand to outstrip supply in the second half of the year.
The Saudi cuts will deepen the market deficit to more than 3 million bpd from July, adding upside pressure in the coming weeks, Jorge Leon from Rystad Energy said.
If the latest OPEC+ curbs push prices higher, rival producers outside the group will also benefit and the biggest rival is the United States.
The U.S. has more than doubled its oil and gas production over the past 15 years, mostly as a result of the development of shale fields.
Shale production plunged during the pandemic and lenders restricted funding, but it has since recovered and US crude exports and output have hit record highs.
OPEC+'s decision to extend existing cuts by another year will likely give U.S. producers much needed longer-term price confidence and boost their capacity to borrow.
Some of Sunday's promised cuts include adjustments to reflect actual production from some members of the group who have been unable to meet existing supply quotas.
While Russia agreed to extend its existing 0.5 million bpd curbs into 2024, Angola and Nigeria agreed to give up their unused quotas. The United Arab Emirates was allowed to boost its production quota by 0.2 million bpd to 3.2 million from 2024.
Kaneva from JPM said the net result would be the OPEC+ decision will reduce supply in 2024 by 1.1 million bpd from previous expectations and cuts could be extended into 2025.
She expects the United States to be able to accommodate that.
"Importantly, with oil prices substantially lower from year-ago levels and U.S. oil liquids production at an all-time high, OPEC’s decision is not expected to become a political issue for the U.S. administration," Kaneva said.
(Additional reporting by Alex Lawler, Ahmad Ghaddar and Maha el Dahan; Writing by Dmitry Zhdannikov; Editing by Simon Webb and Barbara Lewis)