Oil prices surge as Saudi Arabia, Russia extend supply cuts
Oil prices edged higher on Wednesday as the market grew concerned about a supply shortage following the extension of voluntary supply cuts by Saudi Arabia and Russia until the end of the year. Brent crude futures increased by 17 cents, equivalent to a 0.2% rise, reaching $90.21 per barrel, as reported by Reuters. On Tuesday, oil prices breached the $90 threshold for the first time since November, continuing the streak of six consecutive days of gains.
Saudi Arabia and Russia's surprise move
Market analysts and investors had initially anticipated that Saudi Arabia and Russia would prolong their voluntary supply cuts into October. However, the decision to extend these cuts for an additional three months caught many by surprise. Jorge Leon, Senior Vice President at an independent energy research firm Rystad Energy, said in a note, "These bullish moves significantly tighten the global oil market and can only result in one thing: higher oil prices worldwide."
Impact on inflation and economic policy
The impact of these extended cuts on inflation and economic policy in Western nations remains uncertain. However, it's increasingly likely that higher oil prices will lead to more fiscal tightening, especially in the US, to curb inflation. Rystad Energy estimated that global liquids demand will outstrip supply by approximately 2.7 million barrels per day (bpd) in the next quarter, adding further pressure to prices.
Supply concerns and price premiums
In response to these supply concerns, front-month Brent futures are trading near nine-month highs, commanding a $4.10 premium per barrel above prices for delivery in six months. Similarly, the spread between front-month and six-month US WTI futures widened to as much as $4.47 a barrel, also nearing nine-month highs. These premiums reflect the market's apprehensions about potential supply disruptions.
Saudi Arabia and Russia's commitment to stability
Saudi Arabia has extended its voluntary oil output cut of one million bpd until December 2023, while Russia has confirmed a reduction in oil exports by 300,000 bpd for the remainder of this year. These moves follow the April agreement by various OPEC+ producers to extend cuts until the end of 2024. Both Saudi Arabia and Russia will review these decisions monthly, with the option to either deepen the cuts or increase production based on market conditions.
