Kingdom goes it alone to cut production, risking tension with US and reigniting cooling inflation in Europe
Saudi Arabia has risked divisions within Opec, inflaming tensions with the US and reigniting inflation in Europe, all in a bid to boost flagging oil prices.
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The world’s second biggest oil producer has announced plans to cut production by a million barrels a day from July and pledged to do “whatever it takes” to increase the price of oil in order to fund its ambitious development programme.
The surprising move has led to claims that the petrostate has lost some of its influence. “Time was when Saudi Arabia was so powerful that it could command the future, or at least the future of the world economy,” said The Telegraph’s Jeremy Warner. “Not any more. Opec, which has always had Saudi Arabia as its de facto leader, has long since lost much of its discipline, power, and influence”, he added.
What did the papers say?
Despite repeated cuts to output, the price of Brent crude has fallen from its peak of $125 a day a year ago to just over $76 on Friday, “below the level when Russia invaded Ukraine last February and below the crucial $80 price at which the Saudi government can fund its spending”, added The Telegraph in a separate article.
Saudi Arabia has slipped back into a budget deficit this year after reporting a surplus in 2022 for the first time in almost a decade, meaning the kingdom is “in a tight spot when it comes to paying for the gigaprojects that lie at the heart of its Vision 2030 program to transform the economy”, said CNN Business.
Drastically slashing production by a million barrels a day represents “the biggest reduction in years” reported Reuters, and amounts to around 10% of Saudi output, and 1% of global supplies.
Riyadh had hoped to share the production reduction among its Opec+ allies – comprised of the 13 nations that are part of the Organization of the Petroleum Exporting Countries plus 11 other oil-producing states – but was forced to make a surprise unilateral decision after the oil cartel failed to agree a collective deal at a meeting in Vienna on Sunday.
Opec+ pumps around 40% of the world’s crude, “meaning its policy decisions can have a major impact on oil prices”, said Al Jazeera. The problem for Prince Abdulaziz bin Salman, the Saudi energy minister described by Quartz as the “de facto leader of Opec+”, is “that while the rest of the cartel might share his goal, it does not really share his commitment”, said the Financial Times (FT).
African members such as Angola, Nigeria and Equatorial Guinea “have made it clear they have little intention of lowering production”, added the paper, while two of the kingdom’s strongest partners in Opec+, the UAE and Russia, have also resisted the rush to further cuts, with the latter already facing pressure from Western sanctions related to the war in Ukraine.
What next?
Saudi Arabia’s “shock and awe tactics have so far not had the desired effect, with oil prices slumping back to their pre-OPEC+ meeting levels within one trading day”, said OilPrice.com.
“The market reaction so far has been lukewarm,” agreed the FT. “Prices could, of course, slowly grind higher. But the psychology of the market seems untroubled by the prospect of real physical tightness emerging”.
What is certain, said The Telegraph, is that “a further production fall is likely to inflame tensions with Joe Biden, who has encouraged producers to turn on the taps to keep prices low.”
In response to the Saudis’ announcement, a White House official stressed that the Biden administration is “focused on prices for American consumers, not barrels, and prices have come down significantly since last year”.
Biden has already accused Opec members of siding with Vladimir Putin by agreeing to cut output, and with a presidential election next year, the FT said the administration will be “laser-focused on keeping pump prices in check”. The cut “really raises the stakes” of the visit by US Secretary of State Antony Blinken to Saudi Arabia this week, Tom Kloza of the Oil Price Information Service said on Twitter.
“The move also risks reigniting cooling inflation across Britain and Europe,” said The Telegraph, with price rises across the economy closely linked to energy costs. It could also put pressure on Labour leader Keir Starmer to reverse his commitment to ban all new oil and gas production in the North Sea, which unions argue would make Britain more dependent on imports.
Both these factors risk undermining Saudi Arabia’s renewed foreign policy focus to re-build relationships with the likes of Europe, the United States and regional rivals Iran.
At the same time “Riyadh has bet big on China, its biggest trading partner and energy customer”, said CNN, despite concern that its recovery from the pandemic has lost steam.
