Updated: Jun 5
This is a déjà vu. Back in April, Saudi Arabia announced that it would cut oil production. This news increased the price of oil during that month. This month, Saudi Arabia, the leader of OPEC+ countries, has announced on Sunday, June 4 that it would begin cutting oil production by 1 million barrels per day in July to support the “stability and balance of oil markets.” Though the country says it doesn’t use the cost of crude to make oil production decisions, the move is considered to be an attempt to prop up oil prices in response to global economic uncertainty and concerns that international demand could drop. The decision came out of an OPEC+ meeting in Vienna, but the extra cuts announced by Saudi Arabia are being done unilaterally.
The decision to cut oil production was voluntary and it provides a price floor because the Saudis can play with the voluntary cut as much as they like. The kingdom’s output will decline to 9 million barrels per day from around 10 million barrels in May, according to the Saudi Ministry of Energy. International benchmark Brent crude futures traded at $77.95 a barrel at around 1.45 pm, London time, up 2.4%, while U.S. West Texas Intermediate futures stood at $73.65, over 2.6% higher. OPEC+ pumps approximately 40% of the world’s crude and policy decisions can have a significant impact on prices.
Indeed, on April 3, several producers of the oil cartel had revealed a combined 1.66 million barrels per day of production declines until the end of this year. Oil prices surged after the surprise April cut, reaching a peak later that month, but reversed course in subsequent weeks. And many market watchers, including analysts at Goldman Sachs, had expected the alliance to keep output unchanged this time around. Oil prices surged after the surprise April cut, reaching a peak later that month, but reversed course in subsequent weeks.
Global oil production ranges around 100 million barrels a day. There had been pressure on many African nations and Russia to cut production. Meanwhile, the United Arab Emirates will increase its crude output. The new cut would likely push up oil prices in the short-term but the impact after that would depend on whether Saudi Arabia decides to extend it.
While oil producers like Saudi Arabia need revenue to fund their state budgets, they also have to take into account the impact of higher prices on oil-consuming countries. Oil prices that go too high can fuel inflation, sapping consumer purchasing power and pushing central banks like the U.S. Federal Reserve toward further interest rate increases that can slow economic growth.
The Saudi production cut and any increase in oil prices could add to the profits that are helping Russia pay for its war against Ukraine. Russia has found new oil customers in India, China, and Turkey amid Western sanctions designed to limit Moscow’s crucial energy income. However, higher crude prices risk complicating trade by the world’s No. 3 oil producer if they exceed the $60-per-barrel price cap imposed by the Group of Seven major democracies.