2023-08-04 04:27:00
Cut in oil production: a strategic decision
Saudi Arabia, the world’s largest exporter of crude oil, has decided to extend the reduction of its oil production by one million barrels per day for one month. This decision is part of a strategy to stimulate oil prices, which have fallen significantly.
Analysts had anticipated this second extension of the cuts, initiated in July 2023. This Saudi policy, also adopted by Russia, led to a slight increase in oil prices after several weeks of decline.
Which is logical: the drop in production increases tensions on the markets. And when supply drops while demand stagnates or even increases, prices go up.
The details behind Saudi Arabia’s decision
The Saudi Ministry of Energy announced on August 3, 2023 that this reduction policy will continue in September 2023 and could even be “ extended and reinforced “. For the month of September 2023, the kingdom’s production will be around nine million barrels per day.
OPEC+, which brings together members of the Organization of Petroleum Producing Countries and allied states, including Russia, supports this strategy. Oil producers face market volatility, in part due to the lingering aftermath of Russia’s 2022 invasion of Ukraine and an unstable economic recovery in China. By reducing production, they hope to stabilize prices at a high level.
Impacts on world oil markets
Saudi Arabia is betting on high prices to finance a vast program of economic diversification. This program aims to reduce the kingdom’s dependence on the export of crude oil. Following the Saudi announcement, oil prices saw a slight increase.
North Sea Brent crude for October delivery hit $83.62, while US West Texas Intermediate (WTI) for September delivery was $79.97 on Aug. 3, 2023. The rise continued: on August 4, 2023, before the opening of the Paris Stock Exchange, Brent exceeded the symbolic bar of 85 dollars per barrel, at 85.28 dollars, while WTI crossed the 80 dollar mark at 81 $.71 a barrel. Price levels similar to those of April 2023 and which the Stock Exchange had not seen since beginning of May 2023.
Experts estimate that OPEC saw a drop in production of around 900,000 barrels per day, mostly from Saudi Arabia.
Russia follows the downward trend in production
Besides Saudi Arabia, Russia has also pledged to maintain its production cuts in September 2023. Alexander Novak, Russian Deputy Prime Minister, has confirmed that Russia will cut exports by 300,000 barrels per day in September 2023, after a first reduction of 500,000 barrels per day in August 2023.
A decision which, however, should not have any consequences on the French market. Following the war in Ukraine, as a form of sanctions, the price of a barrel of Russian oil was capped at 60 dollars. So much so that Russia now refuses to export its crude oil to countries applying this disadvantageous price cap compared to stock market prices.
Rise in the price of oil: the fuel will burn
The decision to cut crude production to support oil prices on the stock market will have a negative effect on the portfolio of the French. Fuel prices, which have been rising since early July 2023, are expected to continue to rise. The more expensive oil is on the stock market, the more this high price level is reflected at the pump.
Motorists will therefore have to prepare, in the weeks and months to come, for the liter of petrol or diesel to climb further. Will prices once again cross the symbolic bar of 2 euros per litre?
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