Saudi Arabia and other members of the Opec+ group announced surprise oil production cuts totalling more than 1mn barrels a day, putting Riyadh on a collision course with the US as the kingdom attempts to boost prices amid fears of weaker demand.
Saudi Arabia will implement a “voluntary cut” of 500,000 b/d, or just under 5 per cent of its output, in “co-ordination with some other Opec and non-Opec countries”, it said on Sunday.
Russia, a member of Opec+, said it would extend its existing 500,000 b/d production cut until the end of the year. Moscow’s reduction was first announced in March in retaliation for western countries’ moves to impose a price cap on its seaborne oil exports.
The Saudi-led initiative is unusual as it has been announced outside a formal Opec+ meeting, suggesting an element of urgency by the members taking part in the cuts, and is likely to push up oil prices when Asian markets reopen on Sunday evening.
The cuts follow a sharp fall in oil prices last month after the collapse of the US’s Silicon Valley Bank and the forced takeover of Credit Suisse by UBS, which sparked fears of contagion in global financial markets and a significant drop-off in demand for crude.
“Opec+ have made a pre-emptive cut to get ahead of any possible demand weakness from the banking crisis that has emerged,” said Amrita Sen, director of research at Energy Aspects.
The surprise cuts risk reigniting disputes between Riyadh and the US, which last year pushed for the kingdom to pump more oil in a bid 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 full-scale invasion of Ukraine and its attempt to create an energy crisis by slashing gas supplies to Europe, when Opec+ last announced a formal production cut of 2mn b/d.
People familiar with Saudi Arabia’s thinking say Riyadh was irritated last week that the Biden administration publicly ruled out new crude purchases to replenish a strategic stockpile that had been drained last year as the White House battled to tame inflation.
Energy secretary Jennifer Granholm’s statement that it could take “years” to refill the reserve sent oil prices briefly lower. The White House had previously offered reassurance to Saudi Arabia that it would step in to make purchases for its strategic reserve if prices fell.
“We don’t think cuts are advisable at this moment given market uncertainty — and we’ve made that clear,” said a spokesperson for the National Security Council 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 commodity strategy at RBC Capital Markets, said Saudi Arabia was staking out an economic strategy independent of the US, after a deterioration in relations between Riyadh and Washington during the Biden administration.
“It’s a Saudi-first policy. They’re 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 was sending a message to the US that “it’s no longer a unipolar world”.
The voluntary cuts from Opec+ members will begin in May and last until the end of 2023, the Saudi statement said. Iraq will reduce crude production by 211,000 b/d, the UAE by 144,000 b/d, Kuwait by 128,000 b/d, Kazakhstan by 78,000 b/d, Algeria by 48,000 b/d and Oman by 40,000 b/d, according to statements from their respective governments.
Brent, the crude benchmark, fell to a low near $70 a barrel late last month but had stabilised in the past week to recover to just below $80. Brent has traded in a relatively narrow band between $75 and $90 a barrel for much of the past six months.
Despite last month’s sell-off many traders were predicting higher prices later this year when supplies are expected to fall short of 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 the world is underinvesting in oil supplies. The kingdom is reliant on oil revenues to fund the Prince Mohammed’s ambitious economic reform programme.
Additional reporting by Felicia Schwartz in Washington