Saudi Arabia announced that it would cut oil production to 1 million barrels per day, in an effort to boost oil prices. This announcement came after a heated meeting of Opec+ producers on Sunday in Vienna.
Prince Abdulaziz bin Salman of the Kingdom, Opec de facto leader made this move as part a deal whereby several weaker African member countries will have their quotas lowered from next year. The group also said that Russia, which is the second largest oil exporter in the world, may have to lower its production targets. The UAE, meanwhile, will be able increase its production.
Oil prices have fallen in the last 10 months, despite producers’ attempts to tighten supply. After a sudden cut by the kingdom and its members in April, oil prices fell again last week, briefly reaching $90 per barrel.
Oil prices jumped on Monday morning. Brent crude, the international benchmark, rose by 1.1 percent to $76.98 a barrel. The US equivalent West Texas Intermediate climbed by 1.3 percent to $72.66 a barrel. WTI had risen as high as 4.6%, while Brent reached a peak of 3.4%.
Prince Abdulaziz stated that the 1mn b/d reduction will be initially for July, but it could be extended. Prince Abdulaziz described the cut as a “Saudi candy” or sweetener, which was given to the group in order to avoid further cuts.
The minister stated, “We just want to ice the cake” with the work we’ve done. “We will do everything necessary to stabilize this market.”
Saudi Arabia will reduce its production to 9mn barrels per day in July. This is in addition to the voluntary 500,000 barrels-per-day cut announced in April when it was producing around 10.5mn barrels.
Giovanni Staunovo said that the Saudi Arabian statement was “strong” because the 9mn barrels per day production rate was “very low”. Its maximum production capacity is near 12mn b/d.
Staunovo stated that “it is very low when you consider the fact that we’re not in a recession globally.”
It is a signal to the market that, as they put it, they are aiming for’stability’.
According to IMF estimations, Riyadh requires an oil price of more than $80 per barrel in order to balance its budget. It also needs to fund “giga projects” that Crown Prince Mohammed Bin Salman hopes will transform the economy.
The collective production target of the Opec+ Group was adjusted to 40,5mn barrels per day by 2024. This formalised and extended the voluntary reductions announced at group level in April.
The initial distribution of cuts caused controversy, as many African members initially resisted efforts to reduce their production baselines. These figures are meant to represent their maximum production capacity, and are used to determine the size of the cuts that must be made.
After years of underinvestment in Nigeria and Angola and struggling to meet their existing production targets, these Opec countries were unwilling to further cut back.
The UAE, however, has pushed for a higher baseline production as a result of investments made in the industry. The UAE’s production goal will rise by 200,000 barrels per day (b/d) from January onwards to 3.2 million b/d. Analysts say Angola, Nigeria, and other countries will see their production targets reduced. However, this is only to reflect what each country can produce, and not to remove significant barrels from market.
The deal could also result in a reduction of Russia’s production targets, based on an independent review of the current output levels.
As he left the conference, Russia’s Energy Minister Alexander Novak stated, “We always find common ground.”
Opec was criticized for its alliances with Russia after the invasion of Ukraine in full last year. It also came under fire for trying to stabilize prices during a crisis caused by Moscow.
Analysts say that the decline in oil prices from October to now may have encouraged the White House to consider further production cuts as it tries to repair its relationship with Saudi Arabia.
As a result of the pressure being put on the Saudi Energy Minister, who is a brother-in-law to Crown Prince Mohammed de facto, entire teams from Reuters, and Bloomberg were barred from attending meetings at the weekend.
Haitham Al Ghais, the Opec Secretary-General, said that the group had invited other journalists from all over the world, but added that the group will continue to select which reporters it invites. When pressed on the decision, he replied: “This house is ours.”