Saudi’s Oil Cut Sparks Price Rise, Global Economic Worry

The recent decision by Saudi Arabia, a key member of the Organization of the Petroleum Exporting Countries (OPEC), to further cut its oil production has jolted the oil market, leading to an immediate increase in oil prices.

The world’s leading oil exporter has implemented additional voluntary reductions in oil production. The cuts total an additional one million barrels daily for at least a month and extend previous reductions. The Energy Ministry of Saudi Arabia announced that the Kingdom’s total voluntary reduction would amount to 1.5 million barrels per day.

According to Google Finance, this decision led to an upswing in Brent crude, a key global oil price benchmark, which rose by 1.61% on Monday. OPEC+, a global oil alliance including Saudi Arabia, had already cut production by over a million barrels daily in April. This new reduction comes on top of the cut of 2 million barrels daily that OPEC+ announced in October.

Such a scenario presents immediate implications for the U.S. consumer. With this production cut, gas prices could witness a potential increase as early as mid-week, according to Patrick De Haan, GasBuddy’s head of petroleum analysis. Drivers are paying an average of $3.55 for a gallon of regular gasoline, more than $1 lower than a year ago. However, De Haan reassures consumers that any rise in average prices should be reasonably slight.

The Saudi Energy Minister, Prince Abdulaziz, underlined this decision as a “Saudi lollipop” aimed at adding uncertainty to the market. He emphasized the need for market stabilization, a concern echoed by the president of Rapidan Energy, Bob McNally. McNally noted that the unexpected Saudi decision to cut production unilaterally had demonstrated Saudi Arabia’s willingness to act independently to stabilize oil prices.

Ed Morse, Citi’s global head of commodities research and managing director, criticized this move, calling it an “ultimate failure of the Saudis” to bring all OPEC+ members together in a decision to restrain supply. Morse’s concern resonates as he points towards disappointing demand in major consuming regions, including China, the European Union, and the United States.

A broader worry looms over the global economy. Morse points out that the potential for a recession is on the horizon, given the current market conditions and disappointing demand. Commonwealth Bank of Australia suggests that if Brent futures remain in the $70 to $75 per barrel range or even drop below that, Saudi Arabia may look to deepen production cuts.