Global Courant
Frankfurt, Germany — Saudi Arabia will cut the amount of oil it sends to the global economy by taking a unilateral move to support falling crude oil prices after two previous supply cuts by key producer countries in the OPEC+ alliance failed to materialise. succeeded in pushing the oil higher.
The Saudi cut of 1 million barrels a day, which will start in July, comes after the other OPEC+ producers agreed at a meeting in Vienna to extend previous production cuts into next year.
Saudi Energy Minister Abdulaziz bin Salman called the cut a “lollipop” and said at a press conference that “we wanted to freeze the cake”. He said the discount can be extended and the group will “do whatever it takes to bring stability to this market”.
The new cut would likely push up oil prices in the near term, but the impact after that would depend on whether Saudi Arabia decides to extend it, said Jorge Leon, senior vice president of oil market research at Rystad Energy.
The move provides “a price floor because the Saudis can play with the voluntary discount as much as they want,” he said.
The slump in oil prices has helped American drivers fill their tanks more cheaply and has given consumers around the world some relief from inflation.
“Gas is not getting cheaper,” said Leon. “At least it will be a little more expensive.”
The fact that the Saudis felt a further cut was necessary underscores the uncertain outlook for fuel demand in the coming months. There are concerns about economic weakness in the US and Europe, while China’s recovery from COVID-19 restrictions is less robust than many had hoped.
Saudi Arabia, the dominant producer in the OPEC oil cartel, was among the members that agreed to a surprise cut of 1.6 million barrels per day in April. The share of the kingdom was 500,000. That followed OPEC+’s October announcement that it would cut 2 million barrels a day, angering US President Joe Biden by threatening higher gasoline prices a month before the midterm elections.
All told, OPEC+ has now cut production by 4.6 million barrels per day on paper. But some countries cannot produce their quota, so the actual reduction is about 3.5 million barrels per day, or more than 3% of the global supply.
The previous cuts provided little lasting boost to oil prices. International benchmark Brent crude climbed as high as $87 a barrel but has given up on gains after the cut, hovering below $75 a barrel in recent days. US crude has recently fallen below $70.
That’s helped U.S. drivers kick off the summer travel season, with prices at the pump averaging $3.55, down $1.02 from a year ago, according to auto club AAA. Falling energy prices pushed inflation in the 20 European countries that use the euro to the lowest level since before Russia invaded Ukraine.
The Saudis need continued high oil revenues to finance ambitious development projects aimed at diversifying the country’s economy.
The International Monetary Fund estimates the kingdom needs $80.90 a barrel to meet target spending commitments, which include a planned $500 billion futuristic desert city project called Neom.
The US recently topped up its Strategic Petroleum Reserve — after Biden announced the largest release from the national reserve in US history last year — indicating that US officials may be less concerned about OPEC cuts than they have been in recent months.
While oil producers like Saudi Arabia need revenue to fund their state budgets, they must also consider the impact of higher prices on oil-consuming countries.
Excessively high oil prices can fuel inflation, undermine consumer purchasing power and prompt central banks such as the US Federal Reserve to make further rate hikes that could slow economic growth.
The Saudi production cut and any increase in oil prices could add to the profits that will allow Russia to pay for its war against Ukraine. Russia has found new oil customers in India, China and Turkey amid Western sanctions designed to limit Moscow’s vital energy revenues.
However, higher crude oil prices threaten to complicate trading by the world’s No. 3 oil producer if they breach the $60 per barrel price cap imposed by the Group of Seven Major Democracies.
Russia has found ways to circumvent the price limit through “dark fleet” tankers, which tamper with location data or ship oil from ship to ship to disguise its origin. But those efforts come at a cost.
Under the OPEC+ deal, Russian Deputy Prime Minister Alexander Novak said Moscow will extend its voluntary cut of 500,000 barrels per day until next year, Russian state news agency Tass reported.
But Russia may not keep its promises. Moscow’s total exports of oil and refined products such as diesel fuel rose to a record 8.3 million barrels per day in April after the invasion, the International Energy Agency said in its April oil market report.
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AP reporter Fatima Hussein contributed from Washington.
