In June, Saudi Arabia independently lowered its daily production by one million barrels per day (bpd), causing significant controversy during the June 4 OPEC+ meeting when the announcement was made. While the cartel leaned towards maintaining the production quotas from October, the Saudis surprised everyone with a substantial “voluntary” reduction, which they referred to as a “Saudi lollipop.” Saudi Energy Minister Prince Abdulaziz bin Salman believed that this cut would please the OPEC+ alliance by boosting prices and profits.
OPEC members were discontented because Russia has consistently disregarded its own agreements to reduce production and manipulate prices whenever it deems suitable. However, the Saudis managed to convince Moscow to stabilize its production. When Saudi Arabia recently decided to prolong its one million bpd reduction until the end of August, Russia promptly announced its own cut of 500,000 bpd. Consequently, oil prices immediately increased by nearly 90 cents per barrel. Analysts, as cited by the New York Times (NYT), suggested that these coordinated production cuts by Saudi Arabia and Russia were intended to convey the impression that Russia, as a co-chair of OPEC Plus, remains committed to the group’s efforts in market management.
Certain analysts expressed skepticism regarding Russia’s commitment to implementing the complete 500,000 bpd production cut it announced. They suggested that Moscow might hesitate to sacrifice revenue that could be utilized to support the war in Ukraine, as there is a high demand for discounted oil from eager buyers in India and China.
In the meantime, Saudi Arabia is in need of funds to support its ambitious economic diversification program, which aims to reduce its reliance on oil revenues. Crown Prince Mohammed bin Salman introduced this diversification plan in 2016, and Energy Minister Abdulaziz bin Salman, who is the crown prince’s half-brother, actively supports it.
According to Saudi state media, the extension of the production cut was intended to stabilize global prices due to reduced demand from China. The Chinese economy, after a strong start in the first quarter of 2023, is now experiencing a slowdown, leading to a decrease in its oil demand after reaching record highs in the spring.
Foreign analysts have also highlighted other factors behind Saudi Arabia’s decision to cut production, including concerns about the increasing popularity of electric vehicles (EVs) and expectations of a decline in oil demand as various governments raise interest rates.
