Oil prices soar after OPEC+ announces production cuts

Oil prices soared nearly 6% on Monday after Saudi Arabia and other major oil producers said they will cut production by 1.15 million barrels per day from May until the end of the year. 

The cuts in oil output by the so-called OPEC+ countries immediately pushed crude costs higher and were expected to boost gas prices in the U.S. and other countries. Higher oil prices also will complicate the efforts by central banks to rein in inflation.

“This will create both political waves across Europe and even higher general inflation in the USA, leading to renewed pressure on the Federal Reserve to keep hiking rates aggressively,” Clifford Bennett, chief economist at ACY Securities, said in a report.

Higher oil prices would also help Russia, a member of OPEC+, by boosting its coffers as the country wages war on Ukraine and force Americans and others to pay even more at the pump amid worldwide inflation.

It was also likely to further strain ties with the U.S., which has called on Saudi Arabia and other allies to increase production as it tries to bring prices down and squeeze Russia’s finances.

The production cuts alone could push U.S. gasoline prices up by roughly 26 cents per gallon, in addition to the usual increase that comes when refineries change the gasoline blend during the summer driving season, said Kevin Book, managing director of Clearview Energy Partners. The Energy Department calculates the seasonal increase at an average of 32 cents per gallon, Book said.

With an average U.S. price now at roughly $3.50 per gallon of regular, according to AAA, that could mean gasoline over $4 per gallon during the summer.

U.S. benchmark crude oil rose $4.24 to $79.91 per barrel, or 5.6%, in electronic trading on the New York Mercantile Exchange. It rose $1.30 to $75.67 per barrel on Friday, ahead of the weekend meeting where members of the so-called OPEC+ group of oil exporting countries decided on the cuts, which are in addition to a reduction announced last October that infuriated the Biden administration.

Brent crude, the pricing basis for international oils, gained $4.35 to $84.24 per barrel, or 5.4%.

Saudi Arabia friction

OPEC+ includes the original Organization of the Petroleum Exporting Countries as well as Russia and other major producers.

Saudi Arabia announced the biggest cut among OPEC members at 500,000 barrels per day. The cuts are in addition to a reduction announced last October that infuriated the Biden administration.

The Saudi Energy Ministry described the move as a “precautionary measure” aimed at stabilizing the oil market. The cuts represent less than 5% of Saudi Arabia’s average production of 11.5 million barrels per day in 2022.

Kristian Coates Ulrichsen, a Gulf expert at Rice University’s Baker Institute for Public Policy, said the Saudis are determined to keep oil prices high enough to fund ambitious mega-projects linked to Crown Prince Mohammed bin Salman’s Vision 2030 plan to overhaul the economy.

“This domestic interest takes precedence in Saudi decision-making over relationships with international partners and is likely to remain a point of friction in U.S.-Saudi relations for the foreseeable future,” he said.

Saudi Arabia’s state-run oil giant Aramco recently announced record profits of $161 billion from last year. Profits rose 46.5% when compared to the company’s 2021 results of $110 billion. Aramco said it hoped to boost production to 13 million barrels a day by 2027.

The decades-long U.S.-Saudi alliance has come under growing strain in recent years following the 2018 killing of Saudi dissident Jamal Khashoggi, a U.S.-based journalist, and Saudi Arabia’s war with the Iran-backed Houthi rebels in Yemen.

As a candidate for president, Biden had vowed to make Saudi Arabia a “pariah” over the Khashoggi killing, but as oil prices rose after his inauguration he backed off. He visited the kingdom last July in a bid to patch up relations, drawing criticism for sharing a fistbump with Crown Prince Mohammed.

“Geopolitical posturing”

Iraq said it would reduce production by 211,000 barrels per day, the United Arab Emirates by 144,000, Kuwait by 128,000, Kazakhstan by 78,000, Algeria by 48,000 and Oman by 40,000. The announcements were carried by each country’s state media.

Russia’s Deputy Prime Minister Alexander Novak meanwhile said Moscow would extend a voluntary cut of 500,000 until the end of the year, according to remarks carried by the state news agency Tass. Russia had announced the unilateral reduction in February after Western countries imposed price caps.

“Aside from the impact on the physical oil market, it is hard not to think that there is some geopolitical posturing embedded in these voluntary cuts,” Caroline Bain, chief commodities economist at Capital Economics, said in a report. “It demonstrates the group’s support for Russia and flies in the face of the Biden administration’s efforts to lower oil prices.”