Oil Surges Beyond $90 After Saudi Arabia and Russia Prolong Cuts

Brent oil soared past $90 a barrel for the first time since November as the largest OPEC+ producers extended their supply cuts to year-end.

(Bloomberg) — Brent oil soared past $90 a barrel for the first time since November as the largest OPEC+ producers extended their supply cuts to year-end. 

In a move that risks a fresh inflationary impetus for the global economy, Saudi Arabia will continue its unilateral production cutback of 1 million barrels a day until December, according to a statement on the state-run press agency. The move will hold output at about 9 million barrels a day — the lowest level in several years — for six months in total. 

Russia’s Deputy Prime Minister Alexander Novak announced in a separate statement that his country’s export reduction of 300,000 barrels a day will be extended for the same duration  — the latest sign that Riyadh and Moscow are in lockstep on oil policy.

Brent crude is now trading in overbought territory on its relative strength index after rallying in the past week, leaving traders braced for a technical correction. Still, oil markets have been tightening as demand climbs to record levels and inventories tumble. Even mounting concerns about Chinese economic growth have been unable to prevent a summer rally. 

The price increase will likely spur displeasure in the US, where the Biden administration seeks to stave off the threat of $4-a-gallon gasoline. A renewed inflationary spike would squeeze consumers and risks derailing efforts by central bankers across the globe to quell inflation. Fuels like gasoline and diesel are already trading far in excess of headline crude prices. 

The Saudis’ move exceeded market expectations. Twenty of 25 traders and analysts surveyed by Bloomberg last week had predicted the additional cutback would be extended for one additional month.

“Today’s development is a stark reminder to short sellers to not position against the Central Bank of oil,” said Michael Tran, managing director at RBC Capital Markets LLC. “The Saudis would rather overtighten rather than course correct later given the global seasonal peak in demand is in the rearview, particularly given the soft macro framework in China.”

The kingdom first introduced its additional supply cut in July, deepening reductions already made with partners in the OPEC+ alliance. With most members of the coalition already suffering output losses due to underinvestment and operational disruptions, Riyadh opted to make a largely solo initiative to support prices. 

Defending the market has come at a cost for the Saudis. The kingdom suffered the sharpest downgrade to economic growth projections by the International Monetary Fund because of the sales volumes it is losing. Yet this appears to be an acceptable price for the kingdom, which may need oil at almost $100 a barrel to cover the ambitious spending projects of Crown Prince Mohammed bin Salman, according to Bloomberg Economics. 

“This voluntary cut decision will be reviewed monthly to consider deepening the cut or increasing production,” according to the statement published by SPA. Saudi Arabia is aiming to support “the stability and balance of oil markets.”

To get Bloomberg’s Energy Daily newsletter direct into your inbox, click here.

–With assistance from Yongchang Chin.

(A previous version corrects paragraph 7 to reflect Michael Tran is an analyst at RBC Capital Markets)

More stories like this are available on bloomberg.com

©2023 Bloomberg L.P.