Saudi Arabia and other top oil producers announced on Sunday unexpected cuts of up to 1.15 million barrels a day, starting in May and continuing through the rest of the year, in moves likely to push prices higher around the world.
Higher oil prices will help line the coffers of Russian President Vladimir Putin as his nation wages war against Ukraine, and will also cause Americans and others to pay more at the pump in a time of global inflation.
It is also likely to further strain relations with the U.S., which has been demanding that Saudi Arabia and other allies boost output while trying to drive prices down and strain Russian finances.
The output cuts alone are likely to raise gasoline prices in the U.S. about 26 cents per gallon, on top of normal increases that occur as refiners switch gas blends in summer driving seasons, said Kevin Book, managing director at Clearview Energy Partners LLC.
The Department of Energy has calculated seasonal increases at an average of 32 cents per gallon, Book said. So, at the current U.S. average of about $3.50 a gallon for regular gas, according to AAA, this can translate into gas topping $4 per gallon in the summer. However, Book said that oil and gas prices have many complicated variables.
The size of the production cuts for each country depends on what basic production numbers they are using. Therefore, a reduction might not equal 1.15 million. It could also take most of a year for the cuts to kick in. If America goes into recession, caused by a banking crisis, then demand may drop. But it also could rise in the summer, when more people are traveling.
Even if the cut in output is just about 1% of the approximately 100 million barrels the world uses each day, Book says, the impact on prices could be large. Saudi Arabia announced the biggest reduction among the OPEC members, to 500,000 b/d.
“It’s a big deal because of the way oil prices work,” said Kevin Book, managing director of Clearview Energy Partners LLC. “You are in a market that is relatively balanced. You take a small amount away, depending on what demand does, you could have a very significant price response.”
The cuts are on top of cuts announced last October, which enraged the Biden administration. The Saudi energy ministry described the moves as “precautionary measures” meant to stabilize the oil market. The cuts account for less than 5 percent of Saudi Arabia’s average output in 2022, which is 11.5 million barrels a day.
Iraq said it will reduce output by 211,000 b/d, the UAE 144,000, Kuwait 128,000, Kazakhstan 78,000, Algeria 48,000, and Oman 40,000. The announcements were carried on each country’s state media.
Russia’s deputy prime minister, Alexander Novak, meanwhile, said Moscow will prolong voluntary cuts through the end of this year, according to remarks carried by the state-run Tass news agency. Russia announced a unilateral reduction in February, following Western countries implementation of price caps.
All are members of what is known as the OPEC+ group of oil-exporting countries, comprising the Organization of the Original Oil Exporting Countries plus Russia and other large producers.
There was no immediate announcement by OPEC itself. The cuts announced in October—about 2m b/d—came in the run-up to US midterm elections, where skyrocketing prices are the main issue.
President Joe Biden promised then there would be “consequences,” and Democratic lawmakers called for freezing cooperation with the Saudis. Both the United States and Saudi Arabia have denied having any political motivations for the dispute.
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.
“This domestic interest takes precedence in Saudi decision-making over relationships with international partners and is likely to remain a point of friction in U.S.-Saudi relations for the foreseeable future,” he said.
Oil prices have been on the decline since these cuts. Brent crude, a global benchmark, traded around $80 per barrel late last week, down from about $95 at the beginning of October, when the first cuts were agreed.
Analysts Giacomo Romeo and Lloyd Byrne of Jefferies said in a research note the new cuts should enable a “material” decrease in OPEC inventories sooner than expected, and may confirm recent warnings by some traders and analysts that oil demand is easing.
Kristian Koates Ulrichsen, a Gulf expert at the Baker Institute for Public Policy at Rice University, said the Saudis are intent on keeping oil prices high enough to finance ambitious megaprojects linked to Crown Prince Mohammed bin Salmans vision 2030 plan for an economic overhaul.
Saudi state-run oil giant Aramco recently announced record profits, topping $161 billion last year. Profits were up 46.5% compared with the company’s results in 2021 of $110 billion. Aramco said it hopes to increase output to 13 million barrels per day by 2027.
The decades-old U.S.-Saudi alliance has been increasingly stressed in recent years following the 2018 murder of Saudi dissident Jamal Khashoggi, a U.S.-based journalist, and Saudi Arabia’s war against Iran-backed Houthi rebels in Yemen.
As a presidential candidate, Biden promised to make Saudi Arabia “a pariah” for Khashoggi’s murder, but backed down after the price of oil rose following his inauguration.
He visited the kingdom in July of last year to try to repair relations, drawing criticism for sharing a fistbump with crown prince Mohammed. Saudi Arabia has denied siding with Russia over the Ukraine war, though in recent years it has nurtured closer relations with both Moscow and Beijing. Last week, Aramco announced billions in investments in downstream Chinese petrochemicals.
