Saudi Arabia extends oil production cut as central banks fear inflation from rising fuel costs.

Saudi Arabia extends oil production cut as central banks fear inflation from rising fuel costs.

The Organization of Petroleum Exporting Countries (OPEC) has announced that it will continue its cutback of 1 million barrels a day into September, aiming to support the stability and balance of oil markets. This move, along with previous supply curbs, will keep output at about 9 million barrels a day, marking the lowest level in several years. The decision was met with crude futures jumping, reflecting the positive response from investors.

The extension of output cuts by OPEC comes at a time when oil prices have been recovering. Just this week, oil prices reached a three-month high of over $85 a barrel in London. This recovery has been driven by the post-pandemic rebound in fuel demand and the concerted efforts of OPEC+ countries to limit production, which is gradually tightening the global crude markets.

However, with concerns over lackluster data from China and fears of a potential recession in the US, the Saudi government is maintaining a cautious approach. It is worth noting that Bloomberg Economics suggests that the kingdom may need prices as high as $100 a barrel to cover its government spending. Thus, it comes as no surprise that Riyadh is not showing any signs of relaxing its control on oil production.

The decision to extend output cuts aligns with the expectations of traders and analysts surveyed by Bloomberg. Nonetheless, it has drawn criticism from major oil-importing nations. These countries are concerned that rising fuel costs may result in another inflationary spike, potentially hindering central banks in their efforts to manage interest rate increases and putting a strain on consumers.

It is worth mentioning that the additional 1 million-barrel-a-day cut, initially introduced by Saudi Arabia as a unilateral move, has now been joined by Russia. As a member of the OPEC+ alliance, Russia has finally started adhering to its commitments to reduce oil shipments. After maintaining exports for several months to maximize revenue for its conflict with Ukraine, Moscow has gradually begun to lower its export volumes, as evidenced by tanker-tracking data. Deputy Prime Minister Alexander Novak has stated that Russia will continue to cut its crude exports into September but at a reduced rate of 300,000 barrels a day, down from 500,000 barrels a day in August.

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For Saudi Arabia, defending the oil market through output cuts has come with some economic costs. The International Monetary Fund recently downgraded its growth projections for the kingdom, estimating its expansion to be just 1.9% this year, which is significantly lower than its performance in 2022.

Looking ahead, the Saudi and Russian governments will co-chair an online review of market conditions with key OPEC+ members, and the full 23-nation alliance is scheduled to meet in late November. These gatherings will provide an opportunity to assess the effectiveness of ongoing production cuts and discuss future strategies to stabilize and balance the oil market.

In conclusion, the extension of output cuts by OPEC, along with Russia’s commitment to lower its crude exports, reflects the ongoing efforts to support the stability of oil markets. While there are concerns about the economic outlook and potential inflationary impacts, these measures are essential to ensure a balanced supply and demand dynamic in the global oil industry. The upcoming meetings will offer a platform for collaboration among key players in the energy market and the broader OPEC+ alliance to navigate the evolving landscape of oil consumption and production.