Saudi Arabia, other oil producers announce surprise cuts that could raise prices worldwide

Saudi Arabia and other major oil producers on Sunday announced surprise cuts totaling 1.15 million barrels per day from May until the end of the year, a move that could raise prices around the world.

Higher oil prices will help fill Russian President Vladimir Putin’s coffers as his country goes to war with Ukraine, and force consumers around the world to pay more at the pump amid inflation fueled by the conflict.

It could also improve relations with the United States, which has asked Saudi Arabia and other allies to increase production as it tries to lower prices and strain Russian finances.

The Saudi Energy Ministry said the reduction of 500,000 barrels per day would be done in coordination with several OPEC and non-OPEC members, without naming them. The cuts are in addition to cuts announced last October that angered the Biden administration.

The ministry described the move as a “preventive measure” to stabilize the oil market. The cut represents less than five percent of Saudi Arabia’s average production of 11.5 million barrels per day in 2022.

Iraq said it would cut production by 211,000 barrels a day, the United Arab Emirates by 144,000, Kuwait by 128,000, Kazakhstan by 78,000, Algeria by 48,000 and Oman by 40,000. The announcement was made by the state media of each country.

Russian Deputy Prime Minister Alexander Novak said Moscow would cut 500,000 voluntary redundancies by the end of the year, according to comments carried by state news agency Tass. Russia had announced unilateral reductions in February after Western countries imposed price caps.

All are members of the OPEC+ group of oil exporting countries, which includes the original Organization of the Petroleum Exporting Countries as well as Russia and other major producers. There was no direct statement from OPEC itself.

The cuts announced in October – about two million barrels per day – have come on the eve of US midterm elections where rising prices are a major issue. President Joe Biden vowed at the time that there would be “consequences” and Democratic lawmakers called for a freeze on cooperation with the Saudis.

Both the US and Saudi Arabia have denied a political motive in the dispute, with each saying they are focused on keeping market prices healthy.

Saudi prioritizing plans to overhaul the economy

Since the cuts, oil prices have fallen. Brent crude, the global benchmark, was trading at around $80 a barrel late last week, down from around $95 a barrel in early October, when the cut was previously agreed.

Analysts Giacomo Romeo and Lloyd Byrne at investment firm Jefferies said in a research note that the new cuts should allow for a “material” reduction in OPEC supplies earlier than expected and could validate new warnings from some traders and analysts that oil demand is weakening.

Kristian Coates Ulrichsen, a Gulf expert at Rice University’s Baker Institute for Public Policy, said the Saudis are determined to keep oil prices high enough to finance ambitious mega projects linked to Crown Prince Mohammed bin Salman’s Vision 2030 plan to overhaul the economy. .

“These domestic interests take precedence in Saudi decision-making over relations with international partners and will remain a point of friction in US-Saudi relations for the foreseeable future, even ignoring the Russian dimension,” he said.

Saudi Arabia’s state-owned oil giant Aramco recently announced record profits of $161 billion US ($217 billion Cdn) from last year. Profits increased by 46.5 percent when compared to the company’s 2021 results of $110 billion ($148 billion Cdn). Aramco said it expects production to reach 13 million barrels per day by 2027.

The decades-long US-Saudi alliance has been strained in recent years following the 2018 killing of Saudi dissident Jamal Khashoggi, a US-based journalist, and Saudi Arabia’s dangerous war with Iran-backed Houthi rebels in Yemen.

As a presidential candidate, Biden promised to make Saudi Arabia a “pariah” over Khashoggi’s murder, but when oil prices rose after his inauguration he backtracked. He visited the kingdom last July to settle ties, drawing criticism for sharing his fist with Crown Prince Mohammed bin Salman.

Saudi Arabia has refused to side with Russia in the Ukraine war, although it has developed closer ties with Moscow and Beijing in recent years, upsetting its longtime ally in Washington. Last week, Aramco announced a billion-dollar investment in China’s downstream petrochemical industry.