Oil Prices Rise as Saudi Arabia and Russia Extend Production Cuts

Oil prices hit a new annual high as Saudi Arabia and Russia, the world’s largest oil exporters, announced an extension of production cuts. Brent crude, the global benchmark, rose 1.8 percent and traded above ninety dollars per barrel, while the U.S. benchmark, West Texas Intermediate (WTI), increased by a similar amount to eighty-seven dollars per barrel.

Saudi Arabia’s decision to extend a production cut of one million barrels per day until the end of December with monthly reviews for possible deeper cuts or production increases, marks one of the largest production cuts in recent years. This move complements a previously announced reduction, effective since July and set to continue until December 2024.

Saudi Arabia’s extended oil production cuts may strain relations with the White House, given criticism of their collaboration with Russia despite the Ukraine situation, Financial Times reports.

The Biden administration aims to keep fuel prices in check for the upcoming presidential election, during which inflation and fuel costs could become Republican talking points. Industry insiders are concerned Putin may manipulate oil supplies to influence the election, as suggested by potential candidates such as Donald Trump.

Saudi Arabia’s ties with Trump, their desire for higher oil prices for economic reforms, and their energy minister’s assertive stance on oil policy are also factors.

Meanwhile, Deputy Prime Minister of Russia Alexander Novak announced the extension of an additional reduction in production by three hundred thousand barrels per day until the end of 2023. This decision was made to stabilize the situation on the Russian market and support its financial commitments amid ongoing military invasion in Ukraine. According to Novak, the reduction will be reviewed monthly.

In February 2023, Novak announced that Russia would voluntarily cut oil production in March by five hundred thousand barrels per day. This step was intended to help restore market relations in the face of sanctions.

The production cuts by OPEC+ countries, responsible for forty percent of global crude oil production, have contributed to rising oil prices in recent months, potentially impacting inflation and interest rates. Average gasoline prices in the U.S. have also reached 3.81 dollars per gallon, a few cents higher than the previous year.

Previous Jump in Oil Prices

As it was reported in April, oil prices surged by up to six percent following an announcement that Saudi Arabia, Russia, Iraq, and other OPEC+ members would cut production by up to 1.15 million barrels per day from May to the end of 2023.

These cuts had immediate impacts, driving up crude oil prices and likely leading to higher gasoline costs globally. The rise in oil prices posed challenges for central banks, such as the US Federal Reserve, in combating inflation.