What do Saudi Arabia and Russia gain by extending oil production cuts? The US President is trying to do this

The recent extension of oil production cuts by Saudi Arabia and Russia is to maintain stability and balance in the oil market. But how does this decision affect the US and the world oil market?

Một kho chứa dầu của ADNOC tại thủ đô Abu Dhabi. Ảnh: AFP.

Following Saudi Arabia and Russia's decision to extend oil production cuts, the price of Brent crude oil traded above $90 a barrel, the highest price since November 2022. (Source: AFP)

Saudi Arabia on September 5 extended its voluntary crude oil production cuts of 1 million barrels per day until the end of the year. The cuts will bring Saudi Arabia's crude oil production to nearly 9 million barrels per day in October, November and December, and the cuts will be reviewed monthly.

Russia, the world's second-largest oil exporter, also announced an extension of its decision to voluntarily reduce exports by 300,000 barrels per day until the end of 2023.

On the Russian side, Deputy Prime Minister Aleksandr Novak said that the extension of voluntary oil supply cuts aims to strengthen the preventive measures taken by the Organization of the Petroleum Exporting Countries (OPEC) and its partners (OPEC+) to maintain stability and balance in the oil market.

Following the announcement, the price of Brent crude oil traded above $90/barrel, the highest price since November 2022. Previously, the price of crude oil traded in July hit $80/barrel.

Commenting on the decision of the two world oil giants, Bob McNally, president of Washington-based Rapidan Energy Group, said that Saudi Arabia and Russia have "shown solidarity and determination" in managing oil prices that are at risk of rising sharply.

Justin Alexander, director of consultancy Khalij Economics, said Saudi Arabia's decision to cut additional production appeared to have pushed prices up, with supply tightening in the fourth quarter of 2023.

However, the above efforts come at a price, he stressed.

The director of the consulting firm Khalij Economics pointed out that Saudi Arabia's current production is about 9 million barrels/day, much lower than the capacity of 12 million barrels/day - the exploitation level before the cut.

In early August, Saudi Arabia's oil giant Aramco reported second-quarter 2023 profits of $30.08 billion, down 38% from the same period in 2022 - when oil prices spiked due to the Russia-Ukraine conflict.

The company said the profit decline "mainly reflects the impact of lower crude oil prices and weaker refining and chemical product margins."

Goldman Sachs said oil prices could rise next year if the two countries do not lift their drastic supply cuts. The bank forecasts Brent crude to be at $86 in December and $93 by the end of 2024.

Goldman Sachs now sees “two upside risks” to the global oil market.

First, Saudi Arabia’s oil supply will be 500,000 barrels per day lower than previously forecast. “That alone would add $2 per barrel to the price of oil,” the bank noted.

Second, the bank projected that OPEC+ would maintain oil production cuts until the end of 2024. By then, Brent crude prices could rise to $107 a barrel by December 2024.

Goldman Sachs stressed: "OPEC+ strategy could backfire."

While higher oil prices would help Saudi Arabia balance its budget and Russia increase its revenues, if oil prices stay in triple digits, US shale producers will increase supply to reduce prices. Higher prices could also spur more investment in clean energy.

Another reason OPEC+ may not want $100 oil, according to the bank, is because of the “ political importance of U.S. gasoline prices.” U.S. presidents don’t want to see gasoline prices skyrocket, especially before an election.

US National Security Adviser Jake Sullivan said that President Joe Biden is focused on “trying to do everything in the ‘toolkit’ to lower gas prices for American consumers.”

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