Saudi Arabia considers increasing oil production cuts

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Saudi Arabia has indicated the possibility of further reducing its oil production as it extends its voluntary supply cuts with Russia for another month. Despite a recent increase in crude prices that could potentially strain its relationship with the United States, Saudi Arabia aims to support oil prices by implementing production cuts. Over the past year, tensions have arisen between Riyadh and the White House due to differing interests in oil prices, with the US preferring lower prices to boost the economy and limit revenue for Russia. Saudi Arabia will extend its 1-million-barrel-a-day production cut, which has been in effect since July, until the end of September. In addition, Russia will decrease oil exports by 300,000 barrels per day next month.

The Saudi state news agency has stated that the production cut may be further extended or even intensified. This move indicates Saudi Arabia’s willingness to tighten supply in the future. Christyan Malek, the global head of energy strategy at JPMorgan, believes that Saudi Arabia aims to lower output until inventories decrease and the market stabilizes. Although Russia has already agreed to reduce oil supply by 500,000 barrels per day in August, its cut for next month will be slightly smaller.

Despite the recent rally in oil prices, the leaders of OPEC+ have made the decision to continue with the production cuts. In July, oil prices increased by 14% and reached nearly $85 a barrel. Following the announcements, Brent crude, the global benchmark, rose by almost 2% to $84.75 per barrel. This decision was made by the OPEC+ leaders outside of an official meeting, reflecting their commitment to supporting oil prices.

In March 2022, when Saudi Arabia first announced its 1-million-barrel-a-day production cut for July, crude prices had dropped from $130 per barrel to around $75 per barrel. The cut was extended to August at the beginning of July. These production cuts have previously caused tensions between Saudi Arabia and the US. However, senior advisers to President Joe Biden, including Amos Hochstein, have recently traveled to Riyadh to establish a formal relationship between Saudi Arabia and Israel.

Saudi Arabia’s Energy Minister, Prince Abdulaziz, has been at the forefront of efforts by OPEC+ members to increase oil prices. The kingdom is undertaking a vast investment program that requires significant revenue from oil to fund it. Similarly, Russia wants higher oil prices to support its war in Ukraine, as it lost a large portion of its gas export revenues to Europe after cutting off supplies last year.

The reduction in Saudi Arabia’s output is in addition to a voluntary 500,000-barrel-a-day cut announced in April. This means that Saudi Arabia’s oil production will remain at 9 million barrels per day until at least the end of September, which is 25% lower than its maximum capacity of 12 million barrels per day.