Saudi Arabia Makes Production Cuts of 1 Milion Barrels Per Day to Increase Oil Prices

After two rounds of supply cutbacks by OPEC+ failed to bring oil higher, Saudi Arabia has decided to restrict the amount of oil it exports to the global economy on its own.

The other OPEC+ producers committed in Vienna to extend their existing production cutbacks until next year, and now Saudi Arabia has announced it will cut production by 1 million barrels per day starting in July.

Saudi Arabia’s Energy Minister Abdulaziz bin Salman referred to the cut as a “lollipop” and added at a press conference, “we wanted to ice the cake.” He suggested the reduction might be extended and promised that the organization “will do whatever is necessary to bring stability to this market.”

According to Jorge Leon, senior vice president of oil markets research at Rystad Energy, the most recent cut is likely to raise oil prices in the short term, but its long-term impact will rely on whether Saudi Arabia decides to extend it.

This will provide “a price floor because the Saudis can play with the voluntary cut as much as they like,” he added.

The largest oil producer in the OPEC, Saudi Arabia, was one of the countries that agreed to an unexpected cut of 1.6 million barrels per day in April. The kingdom kept 500,000 of it. When OPEC+ said in October that they would be cutting production by 2 million barrels per day, it upset U.S. President Joe Biden by predicting higher gas prices a month before the midterm elections.

In total, OPEC+ has reduced output by 4.6 million barrels per day. However, not all countries can meet their production targets, so the actual cut is closer to 3.5 million barrels per day, or more than 3% of world supply.

Previous reductions did nothing to maintain oil price increases. International benchmark Brent crude hit a high of $87 per barrel before losing its post-cut gains and holding around $75 per barrel in recent days. The price of crude oil in the United States recently fell below $70 per barrel.

In order to finance their massive development programs to diversify the Saudi economy, the Saudis need to maintain strong oil revenues.

According to the International Monetary Fund, Saudi Arabia needs an oil price of $80.90 per barrel in order to fulfill its anticipated spending commitments, which include the construction of a futuristic desert city costing $500 billion, known as Neom.