Recent Saudi Arabian, Russian supply cuts reflect demand concerns

The recent decision by Saudi Arabia and Russia to extend existing crude oil supply cuts did not have the expected effect on prices, but analysts said the limited increase in prices reflects demand-based worries by investors, reports Anadolu Agency.

Saudi Arabia, the world’s largest exporter of crude oil, announced its intention Monday to unilaterally extend production cuts of 1 million barrels per day (bpd) through August, leaving the door open for further extensions.

Russia followed suit with an announcement of a voluntary reduction of exports by 500,000 bpd in August, on top of the 700,000 bpd in place since March.

Algeria later said it would also reduce output by an extra 20,000 bpd in August, bringing its total cut to 68,000 bpd since April.

The new reductions were additions to the group’s already-existing output cap of around 2 million bpd announced in October 2022 and 1.6 million bpd in May.

The supply restrictions came amid concerns about dwindling supplies and deteriorating global economies as a result of inflation and rising interest rates.

Russia and Saudi Arabia said the cuts, which were approved despite persistent requests from the International Energy Agency and the US for more production amid rising threats of a global recession, are intended to maintain market balance.

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Several statements that many countries, including the US, would maintain strict monetary policies, concerns that China’s post-pandemic recovery is not progressing at the expected pace and uncertainty regarding Beijing’s oil consumption continue to feed negative market sentiment.

Although there are short-term rises in oil prices due to production restrictions from Saudi Arabia, Russia and Algeria, fears about weak oil demand limit price increases.

The Brent oil price closed at $74.65 per barrel, down 0.33% on Monday after Saudi Arabia and Russia confirmed their decision to cut production. Brent ended the week at $78.17 with a 4% gain. According to the International Monetary Fund, Saudi Arabia requires Brent crude to trade at roughly $81 to balance its budget.

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