Crude oil prices rose after Saudi Arabia and other members of the Opec+ group announced surprise oil production cuts of more than 1 million barrels a day on Sunday, putting Riyadh on a collision course with the US.
Oil prices rose 8 percent as trading opened in Asia on Monday morning after news of the cut, with international benchmark Brent trading above $86 a barrel and West Texas Intermediate, the US brand, at nearly $81 /b rose.
Saudi Arabia will implement a “voluntary cut” of 500,000 b/d, or just under 5 percent, of its output in “coordination with some other Opec and non-Opec countries,” it said Sunday. The kingdom is trying to raise prices amid fears of weaker demand.
Russia, a member of Opec+, said it would extend its existing production cut of 500,000 barrels a day until the end of the year. Moscow’s cut was first announced in March in retaliation for efforts by Western countries to impose a price cap on its seaborne oil exports.
The Saudi-led initiative is unusual in that it was announced outside of a formal Opec+ meeting, suggesting some urgency from members involved in the cuts.
The cuts follow a sharp fall in oil prices last month after the collapse of the US Silicon Valley bank and UBS’s forced takeover of Credit Suisse, sparking fears of contagion in global financial markets and a sharp drop in crude oil demand.
“Opec+ has made a pre-emptive cut to anticipate potential demand weakness due to the emerging banking crisis,” said Amrita Sen, director of research at Energy Aspects.
The surprise cuts could reignite rows between Riyadh and the US, which last year pushed the kingdom to pump more oil to tame rampant inflation amid a surge in energy costs.
The White House in October accused Saudi Arabia of effectively siding with Russia, despite Moscow’s sweeping invasion of Ukraine and its attempt to create an energy crisis by cutting gas supplies to Europe, when Opec+ last announced a formal production cut of $2 million .b/d announced .
People familiar with Saudi Arabia’s thinking say Riyadh was irritated last week that the Biden administration publicly ruled out new crude oil purchases to replenish a strategic stockpile that was drained last year as the White House fought inflation.
Energy Secretary Jennifer Granholm’s statement that it could take “years” to replenish the reserve sent oil prices briefly lower. The White House had previously assured Saudi Arabia that it would make purchases for its strategic reserve if prices fell.
“We don’t think cuts are advisable right now given the market uncertainty – and we’ve made that clear,” a spokesman for the National Security Council said on Sunday. “[But] We will continue to work with all producers to ensure energy markets support economic growth and lower prices for American consumers.”
Helima Croft, head of commodities strategy at RBC Capital Markets, said Saudi Arabia was charting an economic strategy independent of the US after relations between Riyadh and Washington deteriorated during the Biden administration.
“It’s a Saudi first policy. They are making new friends, as we saw with China,” Croft said, referring to a recent Beijing-brokered diplomatic deal between Saudi Arabia and Iran. The kingdom sent a message to the US that “it’s not a unipolar world anymore”.
Voluntary cuts by Opec+ members will begin in May and last until the end of 2023, the Saudi statement said. Iraq will reduce crude oil production by 211,000 barrels per day, UAE by 144,000 barrels per day, Kuwait by 128,000 barrels per day, Kazakhstan by 78,000 barrels per day, Algeria by 48,000 barrels per day and Oman by 40,000 barrels per day from their respective governments.
Brent, the benchmark crude oil, fell to a low of nearly $70 a barrel late last month but had stabilized over the past week, recovering to just under $80. Brent has traded in a relatively narrow range between $75 and $90 a barrel for much of the past six months.
Despite last month’s sell-off, many traders were forecasting higher prices later this year when supplies are expected to lag demand as China’s economy fully reopens from its Covid-related restrictions.
Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman, the half-brother of Prime Minister and Crown Prince Mohammed bin Salman, has argued that the world is underinvesting in oil supplies. The kingdom relies on oil revenues to fund Prince Mohammed’s ambitious economic reform program.
Additional reporting by Felicia Schwartz in Washington
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