Why Saudi Arabia's oil production cuts are a risky gamble
Saudi Arabia has cut oil production by 1 million barrels per day in an attempt to raise oil prices officially kicked off on 1st July. However, such moves could backfire if oil prices increase too much and could anger China which is the number one buyer of crude oil from Saudi Arabia. Girish Linganna reports
FollowThe Organization of the Petroleum Exporting Countries (OPEC+), which includes resource-rich countries in the Middle East, Latin America, and Africa, plus Russia, have been cutting oil production in an effort to raise prices, which have remained sluggish for the better part of 2023. The cuts have been successful in driving up prices, but they have also led to concerns about a global oil shortage.
It is unclear whether the Saudi oil cuts will be enough to raise prices significantly. However, the cuts are a sign that Saudi Arabia is willing to take action to support the oil market.
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Saudi Arabia has cut oil production for the month of July and may extend the cuts. The global price of crude oil has fallen by 13% (down from sky-high prices seen last year when Russia’s war in Ukraine sent commodity prices soaring) this year, and Saudi Arabia is hoping to help stabilize the market by cutting production. The cuts are a temporary measure, but they could be extended if necessary.
Saudi Arabia hopes that increasing demand from India and China will help keep oil prices steady, but economists say that other factors, such as interest rate hikes and China's economic slowdown, will continue to weigh on demand throughout 2023. Indeed, recession fears in wealthy countries don’t help either.
Saudi Arabia's plan to cut oil production could backfire if oil prices increase too much. This could anger Beijing, Saudi Arabia's number one buyer of crude oil. Additionally, higher oil prices could further aggravate global inflation, causing the US Fed and European Central Bank to raise interest rates again. This could slow economic growth and reduce demand for oil. The next quarter will be a test of Saudi Arabia's mettle, and they must be prepared to play their cards wisely.
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