Adedapo Adesanya
By Adedapo Adesanya
Saudi Arabia on Tuesday extended its 1-million-barrels-per-day voluntary oil production cut until the end of the year.
The Kingdom first applied the 1 million barrels per day reduction in July and has since extended it on a monthly basis.
The cut adds to 1.66 million barrels per day of other voluntary crude output declines that some members of the Organisation of the Petroleum Exporting Countries and its allies (OPEC+) have put in place until the end of 2024.
The reduction will put Saudi crude output near 9 million barrels per day over October, November and December and will be reviewed on a monthly basis.
Fellow heavyweight oil producer Russia — which leads the contingent that joins OPEC nations in the OPEC+ coalition — also pledged to voluntarily reduce exports by 500,000 barrels per day in August and by 300,000 barrels per day in September.
Russian Deputy Prime Minister Alexander Novak on Tuesday said that it will extend its 300,000 barrels-per-day reduction of exports until the end of December 2023 and will likewise review the measure on a monthly basis.
The cuts are described as voluntary because they are outside of OPEC+’s official policy, which commits every non-exempt member to a share of production quotas.
OPEC Secretary-General Haitham al-Ghais has previously said that resorting to voluntary reductions outside of OPEC+ decisions does not suggest divisions in policy views among alliance members.
This move has lifted prices, with Brent crude currently trading at $90.07 per barrel while the US West Texas Intermediate (WTI) jumped to $86.95 per barrel. This move further compounds worries for Nigeria, which will mean an increase in fuel costs at the pumps.
According to CNBC, Saudi Arabia faces a difficult juggling act between implementing oil production cuts and the blow to its crude-reliant economy. However, it could raise prices of its headline crude to offset the trimmed production.
Saudi Arabia depends on oil revenues to support several so-called “giga-projects” designed to diversify its economy. Crude output cuts and a fall in oil prices earlier this year led to a slowdown in its GDP, which expanded by an annual 1.1 per cent in the second quarter, down from 3.8 per cent in the previous quarter and 11.2 per cent in the same period of 2022.
Saudi state-controlled company Aramco typically sells crude supplies through annual contracts that often state minimal volumes to be made available to clients. While Aramco and its customers can mutually agree to forego this requirement, customers can insist on receiving their contracted volumes — which would push Saudi Arabia to either withdraw from its dwindling stocks or increase production.
The Paris-based International Energy Agency (IEA) expects increasing supply tightness in the second half of 2023 as demand recovers in China, the world’s largest crude importer, but that hasn’t materialised.
