Will Saudi Arabia's decision benefit American manufacturers?

Saudi Arabia has designed a complicated OPEC+ deal to punish investors who have counted on lower petroleum prices, but with its latest decision, it may have inadvertently helped prop up the US energy industry for the long term.

Saudi Arabia has pledged to cut its petroleum production by one million barrels per day, equivalent to 10%, in July in addition to the current production cuts by OPEC and its allies. With new production cuts from Saudi Arabia, the group has agreed to withdraw about 4.6 million barrels per day of petroleum supply in July, which is equivalent to 4.6 percent of global petroleum demand of 100 million barrels per day.

OPEC+ also agreed to continue the group's current supply cuts of 3.66 million barrels per day until 2024.

In response to this decision, petroleum prices initially increased by two dollars per barrel and reached $78 per barrel. Analysts say that this growth is just the beginning of an upward trend in petroleum prices, and the steady decline in supply has exacerbated the global supply shortage and could push prices up to $100 per barrel.

Abdulaziz bin Salman Al Saud, Saudi Arabia's energy minister, said that this market needs stability and called his unexpected decision to further reduce Saudi production an improvement of the agreement.

Saudi Arabia's energy minister has repeatedly expressed his anger and promised to punish short sellers who trade on falling petroleum prices. In recent weeks, petroleum prices have fallen to around $70 per barrel, compared to more than $130 last year, when Russia's military attack on Ukraine began.

A source who was aware of the OPEC+ strategy, on the condition of anonymity, told Reuters: “Saudi Arabia's action is aimed at preventing short sellers from lowering petroleum prices.”

JPMorgan analyst Natasha Kaneva said: “Saudi Arabia's reduced production is significant and at the very least, it should limit the downward pressure on prices until the end of the year. Unexpected price increases force short sellers to close their trades at a loss.”

OPEC says it does not set a target for petroleum prices and that the group's policy decisions are made with the aim of preventing volatility by balancing supply and demand.

Tamas Varga from the PVM brokerage company said: “Saudi Arabia's decision to reduce production clearly shows the anger and frustration of producers, especially Riyadh, from the reduction in prices. According to the International Monetary Fund, Saudi Arabia needs a petroleum price of $80 per barrel to balance its budget.”

Previous rounds of OPEC+ production cuts have come under fire from the United States and other consumer nations, which have accused the producers of undermining the global economy by raising energy costs. In response to these criticisms, OPEC+ ministers have stated that they defend their interests and must provide conditions for long-term investment in the petroleum and gas sector. They also say that partial policies to move towards low-carbon energy will reduce investment and could lead to future supply shortages before the world is ready to live without petroleum.

The boom of the US petroleum industry

The United States had a positive opinion about the latest round of OPEC production cuts. A White House official said: “The government's focus is not on petroleum barrels, but the price is important for American consumers, and since last year, the prices have decreased significantly.”

Since the beginning of this year, the weakening of the global economy, the concern about the American banking crisis and the slow recovery of the Chinese economy from the corona restrictions have limited the growth of petroleum prices. But OPEC, as well as the International Energy Agency, which is the energy watchdog of the West, and many observers, expect the increase in demand to exceed the supply in the second half of the year.

Jorge Leon, Rystad Energy analyst, says: “Saudi Arabia's production cut has increased the lack of supply in the market to more than three million barrels per day since July and will increase the upward pressure on prices in the coming weeks.”

If the latest round of OPEC+ production cuts boosts prices, rival producers outside the group will benefit, and the group's biggest competitor is the United States.

Over the past 15 years, the United States has more than doubled its petroleum and gas production, which was mainly the result of the development of shale fields.

Shale petroleum production fell during the Covid-19 pandemic and lenders restricted financing to producers, but it has since recovered and U.S. petroleum exports and production have reached record highs.

OPEC+'s decision to extend active supply curbs for another year is likely to give American producers the long-term price certainty they need and strengthen their borrowing capacity.

Part of the production cut that was announced includes changes to reflect the actual production of some OPEC+ members who have not been able to produce petroleum according to the set quota.

While Russia agreed to extend its current production cut of 500,000 barrels per day until 2024, Angola and Nigeria also agreed to give up their unused production quota. The United Arab Emirates has increased its petroleum production quota by 0.2 million barrels per day from 2024 and will produce 3.2 million barrels per day.

According to JP Morgan analyst, the final result will be that the OPEC+’s decision will reduce petroleum supply in 2024 by 1.1 million barrels per day compared to previous expectations, and the production cuts will continue until 2025, and this will give the United States enough space.

According to the Reuters report, this analyst said: “Most importantly, petroleum prices are significantly lower than last year’s levels, and US crude oil production has reached an all-time high, and OPEC's decision is not expected to be a political issue for the US government.”