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Oil prices climbed above $95 a barrel for the first time in 2023 on Tuesday, as supply cuts by Saudi Arabia and Russia fuelled concerns of a shortfall that could harm the global economy.
Brent crude, the international benchmark, rose as high as $95.33 a barrel and appears on course to challenge $100 a barrel this month, with the rally in prices since June now approaching 30 per cent.
Saudi Arabia and Russia’s decision to reduce supplies despite rising prices has raised tensions with developed economies, with the International Energy Agency warning last week they were “locking world oil markets into substantial deficit”.
Higher oil prices are posing a challenge to central banks’ ability to bring inflation under control, while rising fuel costs could weigh on economic growth. Riyadh and Moscow announced they were extending their voluntary oil supply cuts, which were originally slated to expire this summer, until the end of the year.
“Saudi Arabia together with Russia are in solid control of the oil market,” said Bjarne Schieldrop at Norwegian bank SEB.
“We have a tight market both in terms of supplies and inventories . . . So there should be limited downside in oil prices.”
Prince Abdulaziz bin Salman, Saudi Arabia’s energy minister, on Monday insisted the kingdom’s actions were not about “jacking up prices” and attacked the IEA — which is primarily funded by OECD members — saying it should be “ashamed” of its recent forecasts. He argued that the “jury was out” on the strength of the world economy, implying Saudi Arabia had to pre-emptively manage supply in case global growth slows.
But the clash highlights a growing split between western powers and Saudi Arabia over oil policy, with the kingdom widely seen as having become more assertive in championing its own financial interests over traditional allies.
Crown Prince Mohammed bin Salman — the kingdom’s de facto ruler and half-brother of Prince Abudalziz — is widely believed to favour a higher price to support his ambitious and expensive economic and social reform programme.
Large oil producers have also been angered by the push to temper oil use in favour of renewable energy sources and electric cars, which they view as a long-term threat to their economic security.
Fatih Birol, head of the International Energy Agency, said last week the IEA believes oil, gas and coal demand will all peak before 2030. However, members of the Opec producers’ cartel have criticised that view, accusing the IEA of stoking volatility and undermining confidence in oil investments.
The chief executive of Saudi Aramco, the kingdom’s state energy company, on Monday said predictions for a peak in oil demand were “wilting under scrutiny” and forecast global consumption would be almost 10 per cent higher by the end of this decade.
Western governments have championed renewable energy more aggressively in recent years but are still keen to keep oil prices moderate to support the wider economy.
They also want to ensure Russia is not flush with oil revenues — the biggest contributor to Moscow’s budget — as its war in Ukraine approaches the 18-month mark. While the G7 has imposed a $60 a barrel “price cap” on Russian oil shipped using western services, Moscow is increasingly utilising its own “shadow fleet” to keep exports flowing.
The White House accused Saudi Arabia last October of “aligning” with Russia after the two countries led Opec+ in starting to cut oil supplies, despite Moscow already creating an energy crisis by slashing gas supplies to Europe.
But as Saudi Arabia has deepened and extended production cuts in recent months the White House has been more restrained in its public response, though pressure is building on President Joe Biden to keep prices in check.
The Biden administration is trying to land a major foreign policy win by convincing Saudi Arabia to normalise ties with Israel, while retaining influence over a kingdom that is strengthening links to China and Russia.
Republican candidates, including Donald Trump, have used the rise in oil prices and Biden’s handling of Saudi Arabia to attack his administration ahead of next year’s presidential election.
Analysts at PVM oil brokerage said that six central bank meetings this week — including in the US, UK and Japan — would “do nothing to calm nerves as the clash between considerably reduced [oil] supply and less than reassuring economic outlook continues”.