Brent oil soared past US$90 a barrel for the first time since November as the largest OPEC+ producers extended their supply cuts to year-end.

In a move that risks a fresh inflationary impetus for the global economy, Saudi Arabia will continue its unilateral production cutback of one million barrels a day until December, according to a statement on the state-run press agency. The move will hold output at about nine million barrels a day — the lowest level in several years — for six months in total.

Russia’s export reduction of 300,000 barrels a day will be extended for the same duration, Deputy Prime Minister Alexander Novak said in a separate statement. 

Crude surged after the news, with international benchmark Brent jumping as much as two per cent to $90.75 a barrel as of 2:45 p.m. in London. Global oil markets have been tightening as demand climbs to record levels and inventories tumble. Even mounting concerns about Chinese economic growth have been unable to prevent a summer rally.

The price increase is likely to spur displeasure in the U.S., where the Biden administration is seeking to stave off the threat of $4-a-gallon gasoline. A renewed inflationary spike would squeeze consumers and risks derailing efforts by central bankers across the globe to quell inflation. Fuels like gasoline and diesel are already trading far in excess of headline crude prices.

The Saudis’ move exceeded market expectations. Twenty of 25 traders and analysts surveyed by Bloomberg last week had predicted the additional cutback would be extended for one additional month.

“The market response is appropriate,” said Rebecca Babin, a senior energy trader at CIBC Private Wealth. “This changes the complexion of inventory draws into year-end and tightens the market further.”

The kingdom first introduced its additional supply cut in July, deepening reductions already made with partners in the OPEC+ alliance. With most members of the coalition already suffering output losses due to underinvestment and operational disruptions, Riyadh opted to make a largely solo initiative to support prices.

Defending the market has come at a cost for the Saudis. The kingdom suffered the sharpest downgrade to economic growth projections by the International Monetary Fund because of the sales volumes it is losing. Yet this appears to be an acceptable price for the kingdom, which may need oil at almost $100 a barrel to cover the ambitious spending projects of Crown Prince Mohammed bin Salman, according to Bloomberg Economics.

“This voluntary cut decision will be reviewed monthly to consider deepening the cut or increasing production,” according to the statement published by SPA. Saudi Arabia is aiming to support “the stability and balance of oil markets.”

Prices:

  • Brent for November settlement was 1.4 per cent higher at $90.21 a barrel at 2:51 p.m.in London.
  • WTI for October delivery was at $87.13 a barrel, up 1.8 per cent from Friday’s close.