Oil prices rose about $2,50 this week after the world's largest oil producer Saudi Arabia announced it would cut its oil output by 1 million barrels. The decision is the result of the low oil price, which has fallen sharply due to the weak economy. It is a unilateral action by the Arab country and that is remarkable, since Saudi Arabia usually chooses to reduce its production together with other OPEC + countries.
The oil price has taken a big step upwards this week. Between Wednesday, May 31 and Thursday, June 2, the price of a barrel of Brent oil rose from $72,60 to $76,13. On Wednesday, June 7, oil prices reached their highest point of the week at $76,95.
The oil price rise followed news that Saudi Arabia is cutting its oil production by one million barrels per day. This means that Saudi oil supplies fall to 9 million barrels, the lowest level in years. The decision is remarkable. Normally, the Gulf state chooses to reduce oil supplies together with the OPEC+ countries. By jointly turning on the oil tap, the cartel can influence the price without weakening its own position. Now that Saudi Arabia is opting for an independent intervention, the costs for the country are relatively high compared to the shock effect. Saudi Arabia itself must bear all costs for the reduction. The choice to unilaterally reduce the global oil supply therefore appears to be a drastic measure.
Saudi Arabia previously hinted at lower production when Saudi Energy Minister Abdulaziz bin Salman al-Saud indicated that the country would punish investors who short the oil market. The market assumed that the minister was referring to a new OPEC+ production cut, but this reading was quickly written off because Russia contradicted the Saudi minister's words. It is therefore very likely that Saudi Arabia took this step because the Arab country did not agree with Russia in its plan to put pressure on the oil market. This should not be surprising, because Russia needs all its oil money to continue to fund the war in Ukraine.
Recession fears continue
The Saudi move is the result of the weak economic situation. Due to the ailing economy, demand for oil has stalled considerably. As a result, the oil price has been falling structurally since the summer of 2022 from around $100 to $110 per barrel to $70 to $80. Initially, the economies of Western countries seemed responsible for the lower oil price, but there was hope for oil-producing countries that the opening of the Chinese economy after Covid would fully restore global oil demand.
Less than six months ago, several banks estimated that oil demand would exceed demand in the second half of 2023, causing the price to rise well above $100 per barrel. Slowly but surely, however, it is starting to appear that the Chinese economy is not living up to the high expectations. The industry appears to be very dependent on Western economies and is growing less rapidly than expected. Although the services sector has performed well until recently, growth in that industry is also starting to slow. As a result, confidence in a fast Chinese economy seems to have all but disappeared.
The diesel price has risen along with the oil price this week. On Thursday, June 1, 100 liters of diesel traded for €109,93. On Tuesday, June 5, the price of diesel reached its highest point of the week, at €112,51. The diesel price was €7 on Wednesday, June 111,48, according to the last available quotation.