In an effort to stabilize the declining crude oil prices, Saudi Arabia has decided to independently decrease its oil exports to the global economy. This move comes after two previous supply cuts from major producing countries within the OPEC+ alliance failed to have the desired effect of increasing oil prices, as reported by AP News.
Reduction in oil supply
Saudi Arabia plans to slash oil supply by 1 million barrels per day starting in July, while other OPEC+ producers extend production cuts. The Saudi Energy Minister referred to the reduction as a “lollipop” and stated that it could be extended to bring stability to the market. Short-term oil prices are expected to rise as a result, with the long-term impact depending on Saudi Arabia’s decision to extend the cuts. The move creates a price floor and may lead to slightly higher gas prices for consumers. The previous slump in oil prices provided relief from inflation and cheaper fuel for US drivers.
Uncertain demand for fuel
The decision by Saudi Arabia to implement another oil supply cut reflects the uncertain demand for fuel in the coming months. Economic weaknesses in the US and Europe, coupled with China’s slower rebound from COVID-19 restrictions, have raised concerns. As a dominant producer in OPEC, Saudi Arabia previously participated in surprise cuts of 1.6 million barrels per day in April, following a 2 million barrels per day reduction announced in October. While OPEC+ has officially dropped production by 4.6 million barrels per day, the actual reduction is around 3.5 million barrels per day, accounting for approximately 3% of global supply.
Boom in prices
Previous oil production cuts failed to provide a lasting boost to prices, as Brent crude reached $87 per barrel but has since fallen below $75, while U.S. crude dipped below $70. This decline in prices has benefited U.S. drivers, with pump prices averaging $3.55, down $1.02 from last year. Falling energy prices have also contributed to lower inflation in the eurozone. However, Saudi Arabia relies on sustained high oil revenue to fund ambitious development projects like the $500 billion Neom desert city project. The International Monetary Fund estimates that the kingdom needs oil prices to be around $80.90 per barrel to meet its spending commitments.
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Source: AP News
