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Saudi Arabia and Russia will extend or make additional cuts to oil production in August, the two most powerful members of Opec+ said on Monday, as they scrambled to boost the price of crude.
Saudi Arabia’s state news agency, citing an official source, said the kingdom would extend the 1mn-barrels-a-day production cut announced last month for July into August, while Russia’s deputy prime minister and top energy official Alexander Novak said Moscow would also make a “voluntary” supply cut of an additional 500,000 b/d next month. Oil prices rose slightly on the news.
The move by the Opec+ leaders, made outside of a formal meeting of the group, comes as they have struggled to boost the price of crude oil that has fallen sharply from its peak last year in the immediate aftermath of Russia’s invasion of Ukraine.
Having briefly risen above $130 a barrel last March, oil is now trading closer to $75 a barrel, despite a series of announced production cuts by the group that started in October last year, with traders focusing on high inflation and a potential recession in many large economies.
Saudi Arabia’s energy minister Prince Abdulaziz bin Salman has been at the forefront of efforts to raise the oil price as the kingdom attempts to transform its economy through a vast investment programme that requires high crude revenues to fund it. His half brother, Crown Prince Mohammed bin Salman, is the kingdom’s de facto ruler and the architect of the plan.
Russia also desires a higher price to fund its war in Ukraine, having lost a large part of its gas export revenues to Europe after it largely cut off supplies last year. It is facing a western-imposed price cap on a significant portion of its oil sales as part of retaliatory measures targeting its funds.
The Opec+ cuts have raised tensions in the past between Saudi Arabia and the White House, with US president Joe Biden keen to keep pump prices low ahead of next year’s election while putting the squeeze on Moscow’s revenues. But relatively low prices in recent months have tempered White House responses to one of its oldest allies in the Middle East, having at first accused Opec of effectively supporting Russia against the west.
Oil prices have disappointed the Opec+ group and many traders that had bet on them rising with forecasts of a significant tightening of the market in the second half of this year as China’s economy recovers from Covid.
But economic concerns have consistently weighed on the oil price, while the strength of Russia’s own exports — which have largely held up despite hurdles created by western sanctions — have helped keep global supplies relatively buoyant. While Saudi Arabia has a strong record of sticking to pledged output targets, many traders and analysts believe Russia is less likely to, particularly given it already faces numerous challenges in keeping its oil exports flowing.
Brent crude initially jumped almost 2 per cent on Monday following the announcement, but by lunchtime it was up less than 1 per cent at $76 a barrel. US benchmark West Texas Intermediate was up a similar amount near $71 a barrel.
“Saudi Arabia’s decision to extend its voluntary cuts highlights its determination in preventing [oil] inventories from building amid all the demand uncertainties currently plaguing the market,” said Amrita Sen at Energy Aspects.
“Moscow also committing to a ‘voluntary’ cut will please Saudi Arabia as it demonstrates the strength of their alliance, but the market will want to see how Russia’s oil exports evolve.”
Saudi Arabia’s state news agency on Monday quoted an official source as saying the additional cut for August was designed to “reinforce the precautionary efforts made by Opec+ countries with the aim of supporting the stability and balance of oil markets”.
Novak’s office said the 500,000 b/d cut would be in addition to cuts already pledged.
Saudi Arabia’s own output will remain at about 9mn b/d. When Prince Abdulaziz announced the additional 1mn voluntary cut for July at last month’s Opec meeting in Vienna he had indicated it could be extended. But announcing it so early in the month may add to a sense the group has been disappointed by the market reaction so far.
Oil prices have been relatively flat since it was announced about four weeks ago, fluctuating near $75 a barrel, and are down from roughly $85 a barrel when Opec+ first announced it was moving to restrict supply last October.
Opec and its allies are gathering in Vienna this week for a conference known as the Opec Seminar, but has barred several large news organisations from attending the event.
Speakers from international oil companies, including BP chief executive Bernard Looney and TotalEnergies’ Patrick Pouyanné, are due to appear.