Saudi Arabia announces production cut of 1 million barrels of oil per day

Saudi Arabia announced cuts of 1 million barrels per day of its oil production, in a unilateral step to try to avoid lower international fossil fuel prices.

Previous cuts, made by members of the Organization of the Petroleum Exporting Countries and Allies (Opec+), led to push prices upwards. The decision of Saudi Arabia, OPEC’s dominant producer, took place after negotiations with member countries of the group in Vienna, in Austria, this Sunday (4).

The Saudis fear that two prices will be increased at a time of uncertainty regarding demand. The other members of OPEC+ will agree to extend the previous cuts by the end of 2024, maintaining the group’s production goal.

In addition to receios on the demand side for oil, there are concerns among fuel producers about the economic downturn in the United States and Europe, while China’s recovery was less robust than many expected.

In April, OPEC+ surprised by announcing new cuts of 1.16 million barrels per day, which boosted the commodity and caused fears that global inflationary pressures could be potentiated.

In October 2022, Opec+ had already announced a cut of 2 million neighborhoods per day, which bothered the president of the United States, Joe Biden. Both cuts, however, gave little lasting boost to oil prices.

The Saudis need sustained oil revenues to finance development projects that aim to diversify the country’s economy for the German commodity. The International Monetary Fund (IMF) estimates that the kingdom needs US$80.90 per barrel to meet its planned commitments, which include a non-desert futuristic city project, planned for US$500 billion.

The Saudis, however, also need to take into consideration that higher oil prices can fuel inflation in consuming countries. With less purchasing power, Central Banks, such as the Federal Reserve (Fed), in the US, can increase even more the legal taxes.