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Saudi Arabia has warned it could deepen cuts to oil production as it extended its voluntary supply curbs with Russia for another month, despite a recent rally in crude prices threatening to revive tensions between Riyadh and Washington.
The Opec+ leaders have sought to prop up oil prices with a series of production cuts over the past year, frequently placing Riyadh at odds with the White House, which wants lower prices to support the economy ahead of next year’s election, while limiting revenues flowing to the Kremlin.
Saudi Arabia will prolong its 1mn-barrels-a-day production cut — first implemented in July and dubbed the “Saudi lollipop” or sweetener for the oil market by energy minister Prince Abdulaziz bin Salman — until the end of September, while Russia will cut oil exports next month by 300,000 b/d.
The Saudi cut could also be extended or “deepened”, the Saudi state news agency said on Thursday, citing the country’s Ministry of Energy, indicating that it could tighten supply even further later this year.
“The market thinks that current Saudi production levels were a hard floor, but they’re indicating output could go lower at least until inventories come down and the market stabilises,” said Christyan Malek, global head of energy strategy at JPMorgan.
Russia, which has already agreed to reduce oil supply by 500,000 b/d in August, said it would make a slightly smaller cut next month.
The move by the Opec+ leaders, made outside of a formal meeting of the group, comes despite oil prices rallying 14 per cent in July to near $85 a barrel. Brent crude, the global benchmark, rose almost 2 per cent after the announcements to $84.75 per barrel on Thursday afternoon.
When Saudi Arabia first announced its 1mn b/d production cut for July crude prices had fallen from highs of $130 per barrel in March 2022 to around $75 per barrel. At the start of July, Saudi Arabia extended the cut for August.
The Opec+ cuts have raised tensions in the past between Saudi Arabia and the White House.
Senior advisers to President Joe Biden have travelled to Riyadh in recent weeks to try to broker a formal relationship between Saudi Arabia and Israel, including Amos Hochstein, who also advises the White House on energy matters.
Prince Abdulaziz has been at the forefront of efforts by Opec+ members to raise the oil price as the kingdom attempts to transform its economy through a vast investment programme that requires high crude revenues to fund it.
Russia also wants a higher price to fund its war in Ukraine, having lost a large part of its gas export revenues to Europe after it largely cut off supplies last year.
“Opec+ clearly wants higher prices — higher interest rates are going to increase the cost of borrowing for the grand projects Saudi Arabia wants to develop,” said Keshav Lohiya, founder of Oilytics.
The reduction in Saudi output is in addition to a voluntary 500,000 b/d cut announced by the kingdom in April, when its production was about 10.5mn b/d. It means Saudi Arabia’s oil output will remain at 9mn b/d until at least the end of September, 25 per cent lower than its maximum capacity of 12mn b/d.