Oil prices jump after extending production cuts by Saudi Arabia and Russia

Saudi Arabia and Russia, in coordinated statements on Tuesday, said they would extend their oil supply cuts through the end of 2023.

These moves helped push up oil prices, which have been on the rise in recent weeks. Brent crude futures, the international benchmark, have surpassed $90 a barrel for the first time this year. The price of West Texas Intermediate crude, which is the US benchmark, reached $87.75.

The cuts — 1 million barrels per day from Saudi Arabia and 300,000 barrels per day from Russian exports — are meant to support oil prices. The Saudis first announced voluntary cuts early in the summer, and they have been extended from month to month.

Tuesday’s move to extend it by three months surprised some analysts and seemed to reflect a greater determination to control supply – with the likely result of a price hike.

The combined cuts, intended to show unity among major exporters, could amount to more than 1% of global supply, although it may be difficult to track Russia’s contribution to the cut.

The Saudis also left the door open to the possibility of increases, saying there would be monthly reviews to consider “deepening cuts or increasing production,” in a statement carried by the Saudi Press Agency.

Analysts say the Saudis would prefer a strong market for what remains their main source of income, and appear willing to risk alienating clients, especially those in developing economies, as well as allies such as the United States, to achieve their goals.

The Saudis “see it as their mission to hold the market together,” said Richard Bruns, head of geopolitics at research firm Energy Aspects.

Prince Abdulaziz bin Salman, the Saudi oil minister, was the public face of this more aggressive policy.

Earlier this year, markets largely ignored the hawkish comments of the oil minister, who is the half-brother of Crown Prince Mohammed bin Salman, the kingdom’s chief policymaker. In recent weeks, oil prices have rallied as traders shift from worries about the global economy to worries about low levels of oil in tank farms and continued strong demand.

Crude oil prices have risen more than 20 percent since mid-June. This rise has occurred in the face of persistent economic weakness in China, the most important customer for oil exporters such as the Saudis.

Russia and US shale oil companies, among others, would welcome higher prices, but risk complicating central banks’ efforts to contain inflation.

Selling Brent crude at $90 a barrel or more could increase friction between Riyadh and the Biden administration. However, the White House is focused on efforts to broker diplomatic relations between the Saudis and Israel.

The cuts mean that the Saudis are leaving a significant amount of oil in the ground. According to the announcement carried by the Saudi Press Agency, the giant oil fields in the Kingdom will produce about nine million barrels of oil per day, about two million barrels less than last year.

The Saudis are also investing billions of dollars to increase the amount of oil they can pump, at least in theory. Maintaining the cuts permanently would be self-defeating, but for the time being the Saudis clearly believe they are better off with lower production and higher prices than the other way around.

The prospect of more oil eventually hitting the market from Saudi Arabia and elsewhere is likely to remain in the calculations of traders and analysts. Some analysts said the Saudis’ indication of the possibility of an increase after one of the upcoming monthly reviews was noteworthy.

Analysts at Rapidan Energy Group, a research firm, said after the Saudi announcement: “The explicit reference adds a little more weight to the option” of the increase.