Russia and Saudi Arabia won big thanks to the gamble of reducing oil production

Russia and Saudi Arabia are said to have gained billions of dollars more from oil sales in the past few months, due to rising prices following their decision to tighten supply.

On September 5, Russia and Saudi Arabia announced the extension of measures to tighten oil supply until the end of this year. Retrenchment is a risky strategy, both financially and politically. However, this strategy seems to have worked for the two most important members of OPEC+ (the Organization of the Petroleum Exporting Countries and its allies).

According to calculations by consulting firm Energy Aspects, the increase in oil prices is enough to compensate for the decrease in export volume. Saudi Arabia's oil revenue in the third quarter may have increased by 30 million USD a day compared to the second quarter. This increase is equivalent to 5.7%. For the whole quarter, this number is about 2.6 billion USD. Meanwhile, Russia's oil revenue is estimated to increase by 2.8 billion USD.

This source of money helps Saudi Arabia finance expensive domestic projects, while continuing to invest abroad to increase its influence. It also helps shore up Russia's budget.

Saudi Crown Prince Mohammed bin Salman and Russian President Vladimir Putin. Photo: AFP

These results may cause OPEC+ to consider further tightening supply in the future, observers said. "OPEC+ is in control. It can be seen that they will do more," said Saad Rahim - chief economist at Trafigura.

This organization has put pressure on the global oil market for many months. But before that, their moves were not very effective, due to concerns about a global recession and slow growth in China, causing oil prices to only fluctuate within a narrow range.

In October 2022, OPEC+ announced a production reduction of 2 million barrels a day - the largest since the pandemic appeared. In May, Saudi Arabia led a small group to announce a voluntary cut of an additional 1 million barrels a day. By July, they reduced it by another 1 million barrels. In early September, both Russia and Saudi Arabia simultaneously announced an extension of the reduction policy until the end of the year.

In the third quarter, Brent oil prices increased by 25%, at one point reaching 95 USD per barrel. OPEC+ forecasts a global shortage of 3.3 million barrels of oil a day in the fourth quarter. Many analysts have predicted that Brent oil prices will soon rise to $100.

"Prices will go up. Supply will be tight," said Livia Gallarati - oil analyst at Energy Aspects.

The strategy of reducing supply is very risky, because this means they will have to sacrifice market share to their competitors. If prices do not increase, they must accept a reduction in revenue. The US does not like rising energy prices, because it can increase inflationary pressure on the economy.

Oil production costs in Saudi Arabia and Russia are quite low. Rystad Energy estimates put the figure at $9.3 and $12.8 per barrel, respectively.

High prices benefit Saudi Arabia. This country has gone through many boom and bust periods following fluctuations in oil prices. Their expensive development projects have also had mixed results.

In the first half of 2023, Saudi Arabia's budget spending is 37% higher than the same period last year, according to Capital Economics. Their project to establish a new city worth 500 billion USD has also begun.

Earlier this year, the International Monetary Fund (IMF) estimated that Riyadh needed oil prices at $81 to balance its budget. If they cannot attract foreign investment for the expensive project above, they will need oil prices to increase to 100 USD.

Russia also has to spend heavily this year. In the first quarter, they spent 35% more than the same period last year, according to Oxford Economics. The Russian government has remained in budget deficit since the middle of last year.

Urals - Russia's most popular oil has increased to 75 USD in recent days. In the second quarter, the average price was only 65 USD. Meanwhile, the price ceiling that the West imposes on Russian oil is 60 USD.

Last week, the Kremlin banned the export of gasoline and diesel , further tightening global energy supplies. Global diesel prices immediately jumped.

"If just looking at oil prices, their future looks brighter. This strategy may not be an economic turning point, but it will help them have the finances to continue spending," James Swanston - concluded the economist at Capital Economics.