Oil prices jump after extended production cuts by Saudi Arabia and Russia

Saudi Arabia and Russia said in coordinated statements on Tuesday that they would extend their oil supply cuts until the end of 2023.

These moves helped raise oil prices, which had been rising in recent weeks. Brent crude futures, the international benchmark, surpassed $90 a barrel for the first time this year. The price of West Texas Intermediate crude, the American standard, reached $87.75.

The cuts – 1 million barrels per day from Saudi Arabia’s production and 300,000 barrels per day from Russia’s exports – are aimed at supporting oil prices. The Saudis first announced voluntary cuts early in the summer, and they have been extended from month to month.

The move on Tuesday to extend it by three months surprised some analysts and appears to reflect a greater determination to control supplies – with the likely result of higher prices.

Taken together, the cuts, intended to show unity among major exporters, could amount to more than 1% of global supplies, although Russia’s contribution to the reduction may be difficult to trace.

The Saudis also left the door open to the possibility of increases, saying there would be monthly reviews to consider “deepening the cut or increasing production,” in a statement reported by the Saudi Press Agency.

Analysts say the Saudis prefer a strong market for what remains their main source of income, and appear willing to risk alienating customers, especially those in developing economies, as well as allies such as the United States to achieve their goals.

The Saudis “see it as their job to keep the market together,” said Richard Bruns, head of geopolitics at research firm Energy Aspects.

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Prince Abdulaziz bin Salman, the Saudi oil minister, has been the public face of this more aggressive policy.

Earlier this year, markets largely ignored hawkish comments by the oil minister, the half-brother of Crown Prince Mohammed bin Salman, the kingdom’s chief policymaker. In recent weeks, oil prices have risen as traders shift from concerns about the global economy to concerns about low oil levels at tank farms and continued strong demand.

Crude oil prices have risen more than 20 percent since mid-June. This rise has occurred in the face of continuing economic weakness in China, the most important customer for oil exporters, such as the Saudis.

Russia and US shale companies, among others, will welcome higher prices, but risk complicating central banks’ efforts to contain inflation.

Selling Brent crude at $90 a barrel or more could increase friction between Riyadh and the Biden administration. However, the White House is focusing on efforts to mediate diplomatic relations between the Saudis and Israel.

The cuts mean the Saudis are leaving a large amount of oil in the ground. According to the announcement carried by the Saudi Press Agency, the giant oil fields in the Kingdom will produce about nine million barrels of oil per day, that is, about two million barrels less than last year.

The Saudis are also investing billions of dollars to increase the amount of oil they can pump, at least in theory. Maintaining the cuts permanently would be self-defeating, but it is clear that the Saudis at present believe they are better off with lower production and higher prices than the other way around.

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The possibility that more oil will eventually reach the market from Saudi Arabia and elsewhere is likely to continue to be in the calculations of traders and analysts. Some analysts said the Saudis’ indication of the possibility of an increase after one of the upcoming monthly reviews was noteworthy.

“The explicit signal adds a little more weight to the option” of the increase, analysts at Rapidan Energy Group, a research firm, said after the Saudi announcement.

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