Crude oil prices surged after Saudi Arabia, and other Opec+ members announced unexpected oil production cuts of over 1mn barrels per day on Sunday. This put Riyadh in a collision course to the US.
Oil prices rose by 8 percent Monday morning after trading opened in Asia. Brent, an international benchmark, traded at more than $86 per barrel, while West Texas Intermediate, the US marker, traded at almost $81.
Saudi Arabia will make a voluntary cut of 500,000 b/d (or just under 5% of its production) in “coordination with other Opec or non-Opec nations”, it announced on Sunday. Saudi Arabia is trying to increase prices in response to weaker demand.
Russia, which is a member of Opec+ said that it would increase its 500,000 b/d production cut to the end of the year. Moscow announced its reduction in March as a retaliation to western countries’ attempts to place a price cap for its seaborne oil exports.
This unusual Saudi-led initiative was announced outside of a formal Opec+ meeting. It suggests that the members involved in the cuts are feeling a sense of urgency.
These cuts are due to a sharp drop in oil prices following the collapse of US Silicon Valley Bank and Credit Suisse’s forced takeover by UBS. This sparked fears about contagion in global finance markets as well as a substantial drop in crude demand.
Amrita Sen, Director of Research at Energy Aspects, stated that “Opec+ made a preemptive cut in order to get ahead any potential demand weakness from the bank crisis that has emerged.”
Surprise cuts could reignite disputesbetween Riyadh, the US, and Riyadh last year. This was in an effort to curb rampant inflation due to rising energy costs.
In October, the White House accused Saudi Arabia of siding with Russia despite Moscow’s invasion of Ukraine and its attempts to create an energy crisis in Europe by cutting gas supplies. This was despite Opec+’s last announcement of a formal production cut at 2mn b/d.
People who are familiar with Saudi Arabian thinking claim that Riyadh was upset last week when the Biden administration denied public crude oil purchases to replenish a strategic stockpile, which had been drained last fiscal year while the White House tried to curb inflation.
The statement by Jennifer Granholm, Energy Secretary, that it could take “years”, to replenish the reserve caused oil prices to drop briefly. Saudi Arabia had been assured by the White House that it would purchase strategic reserves if they fell.
A spokesperson for the National Security Council stated that cuts were not recommended at this time due to market uncertainty. “But, we will continue working with all producers to ensure that energy markets support economic growth as well as lower prices for American consumers.”
Helima Croft from RBC Capital Markets was the head of commodity strategy. This follows a decline in relations between Riyadh, Washington, and Washington under the Biden administration.
It’s a Saudi policy. “They’re making new friendships, as we saw in China,” Croft stated, referring to the recent diplomatic deal between Iran and Saudi Arabia , which was mediated by Beijing. It was sending a message that the US “it’s not a unipolar planet”.
According to the Saudi statement, the voluntary cuts by Opec+ members will start in May and continue until 2023. According to statements by their respective governments, Iraq will reduce its crude oil production by 211,000 barrels per day, the United Arab Emirates, by 144,000 barrels per day, Kuwait by 128,000 barrels per day, Kazakhstan by 78,000 barrels/day, Kazakhstan by 78,000 barrels/day, Algeria by 48,000, Oman by 40,000 and Oman by 48,000 each month.
Brent, the benchmark crude oil price, dropped to $70 per barrel late last month, but has stabilized in the past week and is now just below $80. For the majority of the past six month, Brent traded in a narrow range between $75 and $90 per barrel.
Despite the sell-off last month, many traders were anticipating higher prices later in the year. This is because supplies will fall short of demand once China’s economy reopens fully from its Covid-related restrictions.
Saudi Arabia’s energy minister Prince Abdulaziz bin Salman is half-brother to crown prince Mohammed bin Salman. He has claimed that the world is not investing enough in oil supplies. To fund Prince Mohammed’s ambitious economic transformation programme, the kingdom relies on oil revenues.