On Tuesday, the world’s two largest oil producers said they would extend voluntary oil cuts until the end of this year, a decision that boosted energy prices. The announcement from Saudi Arabia and Russia sent Brent crude to a 10-month high. It comes months after OPEC and its allies agreed to cut production voluntarily to boost prices.
It was the first time the OPEC+ coalition had extended the cuts, which began in July and were supposed to last through September. The alliance, which includes Russia, pumps around 40 percent of the world’s oil.
Saudi Arabia’s production cut of one million barrels per day, which first took effect in July, will continue “for another three months until the end of December 2023”, the kingdom’s energy ministry said in a statement. In a separate statement, Russia’s export cut of 300,000 bpd will also continue for the same period, Deputy Prime Minister Alexander Novak said. The Russian government said the cuts will be reviewed monthly to see if they should be deepened or increased.
Oil prices rose to more than $90 a barrel after the announcement, which was expected. The move will likely put more pressure on OPEC member Saudi Arabia’s budget, as the higher prices will boost inflation and gasoline costs. The Saudi government owns 90 percent of oil giant Aramco’s shares. It depends on its revenue to fund Crown Prince Mohammed bin Salman’s sweeping economic reform program, Vision 2030, which aims to shift the economy away from fossil fuels.
However, high prices will also help Russia, under Western sanctions over its war in Ukraine, as it will make it easier to sell oil at a discount to markets such as China. The price rise could also complicate U.S. efforts to pressure Iran into curbing its nuclear ambitions, as a rising oil price will raise the cost of delivering Iranian crude.
The joint decision to extend the cuts sends a clear message that OPEC+ member countries are still committed to supporting the stability of global oil markets, according to a source familiar with the matter. It will also “strengthen the precautionary efforts adopted by OPEC+ members to maintain stability and balance in global markets,” the source added.
The move follows a unilateral decision in April by several OPEC+ members to slash output by more than a million bpd to bolster prices. The decision was hailed as a breakthrough in the years-long struggle to rebalance the market, but the price recovery was short-lived. A series of subsequent OPEC+ policy decisions have failed to push prices back up to the pre-sanctions levels of more than $100 a barrel. A senior Aramco executive said the company had sufficient supplies to meet demand in a separate statement. Aramco Chief Executive Amin Nasser said the company’s “mid to long-term view remains unchanged.” He said the firm was looking forward to higher demand for oil and expected a rebound in economic activity in China.
