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. 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.