FRANKFURT, Germany (AP) – Saudi Arabia will reduce its oil supplies to the global economy in a unilateral move to shore up falling crude prices after two previous supply cuts by major OPEC+ alliance producing countries failed to push oil higher.
The Saudi cut of 1 million barrels a day, set to begin in July, comes at a time when other OPEC+ producers have agreed at a meeting in Vienna to extend previous production cuts until next year.
Saudi Energy Minister Abdulaziz bin Salman called the cut a “lollipop” and told a news conference, “We wanted to put icing on the cake.” He said the cut could be extended and the group would “do whatever is necessary to bring stability to this market.” to rent”.
The new cut would likely boost oil prices in the short term, but the impact afterwards would depend on whether Saudi Arabia decides to extend it, said Jorge Leon, Rystad Energy’s senior vice president of oil market research.
The move provides “a price floor because the Saudis can play with the voluntary cut as much as they want,” he said.
The collapse in oil prices has helped US motorists to fill up their gas tanks more cheaply and has given consumers around the world some relief from inflation.
“Gas is not getting cheaper,” Leon said. “If anything, it will be marginally more expensive.”
That the Saudis felt another cut was necessary underscores the uncertain outlook for fuel demand in the coming months. There are concerns over economic weakness in the US and Europe, while China’s recovery from COVID-19 restrictions has been less robust than many had hoped.
Saudi Arabia, the OPEC oil cartel’s dominant producer, was one of several members that surprisingly agreed in April to cut production by 1.6 million barrels a day. The kingdom’s share was 500,000. This followed OPEC+’s announcement in October that it would cut production by 2 million barrels a day, which angered US President Joe Biden by threatening higher gasoline prices a month before the midterm elections.
All in all, OPEC+ has now reduced production by 4.6 million barrels per day on paper. However, with some countries failing to meet their quotas, the actual reduction is about 3.5 million barrels per day, or over 3% of global supply.
Previous cuts have provided little sustained boost to oil prices. International benchmark Brent crude climbed as high as $87 a barrel but has given back gains after the cut to trade below $75 a barrel for the past few days. US Crude Oil recently fell below $70.
That has eased the start of the summer travel season for US motorists, as prices at the pump average $3.55, down $1.02 from a year ago, according to the AAA. Falling energy prices also helped push inflation in the 20 European countries that use the euro to their lowest levels since Russia invaded Ukraine.
The Saudis need sustained high oil revenues to fund ambitious development projects to diversify the country’s economy.
The International Monetary Fund estimates that the kingdom needs $80.90 a barrel to meet its planned spending commitments, which include a proposed $500 billion futuristic desert city project called Neom.
The US recently replenished its strategic oil reserves – after Biden last year announced the largest national reserve release in American history – an indicator 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 government budgets, they also need to consider the impact of higher prices on oil-consuming countries.
Excessively high oil prices can fuel inflation, sap consumers’ purchasing power and push central banks like the US Federal Reserve to raise interest rates further, which can slow economic growth.
The Saudi production cut and any rise in oil prices could add to the profits that help Russia fund its war against Ukraine. Russia has found new oil customers in India, China and Turkey amid Western sanctions aimed at limiting Moscow’s key energy revenues.
However, there is a risk that higher crude oil prices could complicate trading for the world’s third-largest oil producer if they exceed the $60-a-barrel price cap set by the Group of Seven Major Democracies.
Russia has found ways to circumvent the price cap through “dark fleet” tankers that manipulate location data or ship oil from ship to ship to disguise its origin. But these efforts come at an additional cost.
According to the state-run Russian news agency Tass, Russian Deputy Prime Minister Alexander Novak said that under the OPEC+ deal Moscow would extend its voluntary cut of 500,000 barrels a day until next year.
But Russia may not keep its promises. Moscow’s total exports of oil and refined products like diesel fuel rose to their highest level since the invasion of 8.3 million barrels a day in April, the International Energy Agency said in its April oil market report.
AP reporter Fatima Hussein contributed from Washington.