Oil prices surge for six consecutive weeks amid OPEC+ cuts
Saudi Arabia and Russia are keen on driving up oil prices as high as possible. By reducing their crude oil production, they’re wielding their influence to maximize their profits.
Last Friday, oil prices soared for an unprecedented sixth consecutive week after these two prominent global oil producers revealed that they would be continuing their voluntary supply cuts into September.
Initially, these cuts were meant for July only, then extended into August, and now September. To add to the uncertainty, Saudi Arabia confirmed on Thursday that the cuts might last even longer. These reductions are in addition to the existing output quotas from the broader OPEC+ group, which will be maintained throughout 2023. Russia also chose to decrease its oil exports by 300,000 bpd for September.
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The cuts are having their desired effect, with oil prices rising around 12 percent in the past month, reaching approximately US$83 a barrel. The oil markets have tightened significantly, and it’s conceivable that prices could hit triple digits later this year. This surge in prices is already being felt by consumers at the pump as costs escalate, putting pressure on household budgets.
These actions are not without motive. Saudi Arabia requires oil at $90 per barrel at a minimum to fund its ambitious Vision 2030 plan. “The kingdom will want to see a protracted rise toward $90 a barrel and possibly improvement in Chinese economic data to start considering putting the one million bpd back into the market,” Tamas Varga, an analyst at brokers PVM Oil Associates Ltd. in London, told Bloomberg.
Analysts speculate that the kingdom might even need oil at US$100 per barrel to balance its budget. “Opec+ clearly wants higher prices – higher interest rates are going to increase the cost of borrowing for the grand projects Saudi Arabia wants to develop,” Keshav Lohiya, founder of Oilytics, told the Financial Times. The International Monetary Fund is more conservative toward Saudi funding needs. It says Saudi Arabia needs Brent crude to trade at about US$81 per barrel to balance its budget.
Saudi Arabia, which had the fastest-growing economy in the G20 last year, now faces a slowing growth rate, with projections at just 1.9 percent for 2023. After experiencing a budget surplus for the first time in almost 10 years in 2022, the kingdom slipped into a deficit early this year. As such, a revamp of its revenue is a pressing need.
Russia, too, has its eyes on bolstering its financial reserves, primarily to support its war in Ukraine. A decline in oil export revenues has left Russia eager to collaborate with Saudi Arabia to increase oil prices.
Russian Deputy Prime Minister Alexander Novak echoed Saudi Arabia’s commitment to maintain supply cuts into September, demonstrating a co-ordinated effort between the two nations. “Within the efforts to ensure the oil market remains balanced, Russia will continue to voluntarily reduce its oil supply in September, now by 300,000 bpd, by cutting its exports by that quantity to global markets,” he told the press, almost in conjunction of the Saudi announcement on extending output cut to September.
However, a significant question is how long this co-operative strategy can be sustained. The reductions are already having negative impacts, such as decreased revenue for Saudi Arabia. Success hinges on global oil demand, and both countries cannot continue these voluntary cuts indefinitely.
The world’s need for oil will eventually influence their actions, possibly sooner rather than later.
Toronto-based Rashid Husain Syed is a highly-regarded analyst specializing in energy and politics, with a particular emphasis on the Middle East. Besides his contributions to both local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. His insights on global energy matters have been sought after by organizations such as the Department of Energy in Washington and the International Energy Agency in Paris.
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