Oil rose Monday after top exporters Saudi Arabia and Russia announced supply cuts for August, overshadowing concern over a global economic slowdown and the potential for further increases to U.S. interest rates. The Organization of the Petroleum Exporting Countries and its allies are reducing production by 1.7 million barrels per day this month, tightening crude supplies, and boosting prices.
Saudi Arabia, the world’s biggest producer within the Opec+ group, said it would extend a voluntary cut of one million barrels per day for another month to include August. The Saudi move is intended to support prices for producers, which have slumped from above $100 a barrel last year as the global economy struggles and interest rate hikes hit consumer spending.
Russia, seeking to nudge global oil prices in concert with Riyadh, will reduce its oil exports by 500,000 bpd for August, Deputy Prime Minister Alexander Novak said, further tightening global supplies. The announcements boosted oil futures, trading close to their lowest levels in over three months.
The Saudi and Russian moves could further inflame tensions between the kingdom and Washington. Last year, the Saudis led a surprise production cut in October just before the U.S. midterm elections, angering President Joe Biden and prompting lawmakers to call on the kingdom to stop cutting.
But despite the differences, there is still much in common between Russia and Saudi Arabia, such as their dislike of Western policies that interfere with their lucrative energy markets. In recent years, Moscow and Riyadh have used their shared dislike of the United States to incentivize counterterrorism cooperation, fight piracy off the coast of Africa, and curb Iran’s nuclear ambitions.
The two countries also share an interest in keeping oil prices elevated as a means of helping their economies. For both nations, a high price for oil makes it more profitable to export crude to overseas customers. That, in turn, supports jobs and other sectors of their economies.
The Saudi and Russian moves will likely whipsaw some of the market’s speculative positioning, which has been heavily bearish this year as investors worry about a global recession and interest rate hikes in the United States. Speculators have placed the most significant number of outright bearish bets on West Texas Intermediate since 2017, according to CFTC data. That means many money managers and hedge funds bet the oil price will fall. That can lead to steep sell-offs when prices are on the decline. The Saudi and Russian decisions may help to nudge prices up, but they won’t be enough to reverse the long-term trend toward lower crude prices. The Brent contract is down about 11% this year. The WTI contract is down about 7%. The two contracts are traded on the New York Mercantile Exchange.
