Saudi Arabia, the leader of OPEC, has decided to extend its oil production cut for at least another month, further tightening the supply and potentially causing gasoline and energy prices to rise. According to an official source from the Saudi Ministry of Energy, the kingdom will continue the voluntary cut of one million barrels per day throughout September. The source mentioned the possibility of further extensions, indicating the move aims to support the stability and balance of oil markets.
Impact of the Restrained Supply
This extension marks the second time Saudi Arabia has prolonged the cut, which was initially announced in June during a meeting of the alliance between the Organization of the Petroleum Exporting Countries (OPEC), Russia, and other smaller producers. Around the same time, Russia also announced its plans to cut oil exports by 300,000 barrels per day in September.
Following the news, US oil prices rose by 1.6% on Thursday, reaching $81.05 a barrel, while Brent crude, the global benchmark, surged by 1.5% to $84.50 a barrel.
Industry analysts believe that the actions taken by Saudi Arabia and Russia were already factored into the oil market, which has been experiencing upward momentum in recent weeks. Rick Joswick, head of near-term oil research and analysis at S&P Global Commodity, stated that although the announcement supports the price increases, it is unlikely to cause a significant spike in prices by itself.
However, the prolonged supply restraint from these two major oil producers comes at a time when oil prices have been rebounding, leading to higher pump prices for US consumers, reaching nine-month highs. The situation has raised concerns, with some experts highlighting that it contradicts the US effort to control inflation. Robert Yawger, vice president of energy futures at Mizuho Securities, pointed out that both Russia and Saudi Arabia are relying on higher oil prices to fund their budgets.
Regular Gasoline’s Average Rises
The national average for regular gasoline in the US climbed to $3.82 a gallon on Thursday, the highest since late October 2022, with a 28-cent increase over the past month. The spike in gas prices has been influenced by OPEC’s supply cuts and the disruptions caused by extreme heat on refineries. If prices continue to rise, there is a risk of reaching levels that could lead to a decrease in demand.
Yawger mentioned that $4 per gallon is a crucial threshold, as prices beyond this point could result in demand destruction, negatively impacting the economy. Additionally, diesel, a critical fuel for trucks, trains, and boats, is also experiencing significant price hikes.
The decision to extend the oil production cut reflects the financial challenges faced by both Saudi Arabia and Russia. Saudi Arabia needs Brent crude to trade around $81 a barrel to balance its budget, as per the International Monetary Fund’s estimation. The kingdom reported a budget deficit this year after a surplus in 2022, the first in nearly a decade. Meanwhile, Russia is seeking to bolster its revenues to support its war efforts in Ukraine, as oil export revenue plunged by $1.5 billion in June, dropping to nearly half the level from a year ago, according to the International Energy Agency.