Saudi Arabia and Russia have agreed to extend their voluntary oil production cuts until the end of the year. This move will remove 1.3 million barrels of crude from the global market, resulting in increased energy prices. The announcement from Riyadh and Moscow has already pushed benchmark Brent crude above $90 per barrel for the first time since November. However, the extension of these production cuts may have negative consequences, such as increased inflation and higher costs for motorists at gasoline pumps. It also puts strain on Saudi Arabia’s relationship with the United States, as President Joe Biden previously warned the kingdom about potential consequences for partnering with Russia, who is currently involved in a conflict with Ukraine.
According to the state-run Saudi Press Agency, Saudi Arabia will continue to closely monitor the market and take further action if necessary. The Saudi Press Agency report emphasizes that this additional voluntary cut is in line with the efforts made by OPEC+ countries to support the stability and balance of oil markets. The deputy prime minister and former energy minister of Russia, Alexander Novak, also affirmed Russia’s commitment to a 300,000 barrel per day cut. Novak stated that this decision aims to strengthen the precautionary measures taken by OPEC+ countries to maintain stability and balance in oil markets.
The extension of these cuts has already had a positive impact on oil prices, with Brent crude trading above $90 per barrel. Previously, Brent crude had remained within the $75 to $85 per barrel range since October. The price of West Texas Intermediate, a benchmark for America, also reached over $87 per barrel. There has been no immediate response from Washington, although US lawmakers have previously criticized OPEC, Saudi Arabia, and Russia for their production decisions.
Energy expert Bob McNally believes that these supply cuts will result in significant deficits in global oil balances and should drive crude oil prices well above $90 per barrel, unless there is a sharp economic downturn. Currently, the average gallon of regular unleaded gasoline in the US is $3.81, just slightly below the all-time high for Labor Day. It remains uncertain how these developments will immediately affect the American market, as gasoline demand typically drops for US motorists after the holiday.
Another factor influencing gasoline prices is the ongoing hurricane season, with Hurricane Idalia recently impacting Florida and the potential for more storms along the Gulf coast. Higher gasoline prices can increase transportation costs and contribute to higher prices for goods during a time when interest rates are already being raised to combat inflation.
The Saudi reduction in oil production started in July and coincides with the extension of production cuts by other OPEC+ producers. However, previous production cuts over the past year have not significantly boosted prices due to weakened demand from China and tighter monetary policies implemented to address inflation. Nevertheless, as international travel gradually returns to pre-pandemic levels, the demand for oil is expected to continue increasing.
Saudi Arabia is especially motivated to elevate oil prices in order to support its Vision 2030 plan, which aims to diversify the kingdom’s economy, reduce its reliance on oil, and create employment opportunities for its young population. This plan encompasses various ambitious infrastructure projects, including the construction of the futuristic city Neom, estimated to cost $500 billion.
However, Saudi Arabia also needs to carefully navigate its relationship with the United States. President Biden campaigned on the promise of holding Crown Prince Mohammed bin Salman accountable for the killing of journalist Jamal Khashoggi in 2018. Although tensions have somewhat eased recently, talks between the Biden administration and Saudi Arabia involve considerations such as a nuclear cooperation deal that includes uranium enrichment in the kingdom. This raises concerns among nonproliferation experts about the potential for a nuclear weapons program.
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