Saudi Arabia has announced a significant oil supply cut to the global economy, a move that could potentially lead to an increase in gas prices.
Saudi Arabia Announces Oil Supply Cut
The unilateral decision of Saudia Arabia’s oil supply cut comes after previous attempts by major producing countries in the OPEC+ alliance to reduce supply failed to push oil prices higher, CBS News reported.
Starting in July, Saudi Arabia plans to have an oil supply cut production by 1 million barrels per day. While other OPEC+ producers have agreed to extend production cuts through the following year, the Saudi cut is seen as an additional measure to support the market.
Saudi Energy Minister Abdulaziz bin Salman referred to the reduction as a “lollipop” and expressed the possibility of extending the oil supply cut further if needed.
The immediate impact of the oil supply cut is expected to drive up oil prices, but the long-term effects will depend on Saudi Arabia’s decision to extend the reduction.
Jorge Leon, senior vice president of oil markets research at Rystad Energy, suggests that the oil supply cut provides a price floor, as Saudi Arabia has the flexibility to adjust its voluntary reduction as desired.
The decision by Saudi Arabia reflects the uncertain demand for fuel in the coming months. Economic concerns persist in the United States and Europe, while China’s recovery from COVID-19 restrictions has been slower than anticipated.
As the dominant producer in the OPEC oil cartel, Saudi Arabia was among the members that previously agreed to significant production oil supply cuts. However, the lasting impact on oil prices has been limited.
The previous oil supply cut temporarily boosted prices, but they have since declined. Brent crude, the international benchmark, has hovered below $75 per barrel, and U.S. crude has dipped below $70.
While falling oil prices have aided U.S. drivers and helped reduce inflation, Saudi Arabia depends on sustained high oil revenue to support its ambitious development projects sought at diversifying the country’s economy.
Saudi Arabia’s Oil Supply Cut Raises Concerns
The production oil supply cut by Saudi Arabia has implications beyond the oil market. Higher oil prices can fuel inflation and impact consumer purchasing power, potentially leading central banks, such as the U.S. Federal
Reserve, to consider interest rate hikes that could slow economic growth. Moreover, increased profits from higher crude prices could further support Russia’s war against Ukraine, as the country has sought new oil customers amid Western sanctions.
However, if crude prices exceed the $60-per-barrel price cap imposed by the Group of Seven major democracies, it could complicate trade for Russia, the world’s third-largest oil producer. Russia has been using tactics like “dark fleet” tankers to evade the price cap, but these strategies come with added costs.
While Russia has committed to extending its voluntary oil supply cut of 500,000 barrels per day through next year, there are concerns that it may not fully comply.
In summary, Saudi Arabia’s decision to oil supply cut aims to stabilize the market and counterbalance previous production cuts. The oil supply cut move could lead to short-term price increases, but its long-term impact depends on various factors, including the extension of the reduction and global demand for fuel.