Saudi Arabia and Russia on Tuesday agreed to extend their voluntary oil production cuts until the end of this year, removing 1.3 million barrels of crude from the world market and raising energy prices.
The dual announcements from Riyadh and Moscow pushed benchmark Brent crude to around $90 a barrel on Tuesday, a price not seen in the market since November.
The countries’ actions could increase inflation and the costs for motorists at the pumps.
It is also putting fresh pressure on Saudi Arabia’s relationship with the United States, as President Joe Biden last year warned the kingdom that a partnership with Russia would have unspecified “consequences” in the event of cuts while Moscow wages war on Ukraine.
Saudi Arabia’s announcement by the state-run Saudi Press Agency said the country would continue to monitor the market and take further action if necessary.
“This additional voluntary cut is intended to increase precautionary efforts by OPEC+ countries to support stability and balance in oil markets,” the Saudi Press Agency report said, citing an unnamed Energy Ministry official.
Russia’s state news agency Tass quoted Alexander Novak, Russia’s Deputy Prime Minister and former energy minister, as saying Moscow will continue its cuts of 300,000 barrels a day.
The decision “aims to increase precautionary measures by OPEC+ countries to maintain stability and balance in oil markets,” Novak said.
Benchmark Brent crude traded above $90 a barrel on Tuesday following the announcement.
Brent has largely fluctuated between $75 and $85 a barrel since October of last year. A barrel of West Texas Intermediate, a benchmark for America, was trading at $86.69 a barrel, up 1.3%.
There was no immediate response in Washington, although US lawmakers have criticized OPEC, Saudi Arabia and Russia for their past production decisions.
Bob McNally, founder and president of Washington-based Rapidan Energy Group and a former White House energy adviser, said Saudi Arabia and Russia have “demonstrated their unity and determination to proactively manage the risk that oil prices could rise in tougher economic conditions.” could go down”. with their announcement on Tuesday.
“Barring a severe economic downturn, these supply cuts will result in large deficits in global oil balances and should push crude oil prices well above $90 a barrel,” McNally said.
The average gallon of regular unleaded gasoline in the U.S. is $3.81, according to the AAA, just below the Labor Day all-time high of $3.83 set in 2012.
However, gas demand for US drivers typically falls after the holiday, so it’s unclear what immediate impact this could have on the US market, AAA spokesman Andrew Gross said.
“I’m more worried about what the rest of the hurricane season might bring,” Gross told The Associated Press. “A major storm along the Gulf Coast could change prices here dramatically.”
Hurricane Idalia Just plowed through Florida and US forecasters said Tuesday a new tropical depression in the Atlantic Ocean could become a “major hurricane.”
Meanwhile, higher gasoline prices can increase transportation costs and ultimately push commodity prices even higher, while the US and much of the world are already raising interest rates to fight inflation.
The Saudi cut, which began in July, comes as other OPEC+ producers agreed to extend earlier production cuts until next year.
A series of production cuts over the past year The country has failed to boost prices significantly due to weaker demand from China and tighter monetary policy to combat inflation.
However, with international travel returning to near pre-pandemic levels, demand for oil is likely to continue to rise.
The Saudis are particularly keen to raise oil prices to fund Vision 2030, an ambitious plan to revitalize the kingdom’s economy, reduce its dependence on oil and create jobs for a young population.
The plan includes several massive infrastructure projects, including building a futuristic $500 billion city called Neom.
But Saudi Arabia also needs to manage its relationship with Washington. Biden campaigned to make the kingdom’s powerful crown prince, Mohammed bin Salman, a “pariah” over the 2018 assassination of Washington Post columnist Jamal Khashoggi.
Tensions eased slightly in recent months as Biden’s government sought an agreement with Riyadh on diplomatic recognition of Israel.
But those talks also include Saudi Arabia pushing for a nuclear cooperation deal that includes America allowing uranium enrichment in the kingdom – something that has nonproliferation experts worried as spinning centrifuges open the door to a possible weapons program.