Oil prices rally in response to production cut extension in Saudi Arabia

Aug. 3 (UPI) -- The Ministry of Energy in the Saudi government said Thursday it would extend a voluntary production cut of 1 million barrels per day to September, sources told the official news agency.

The Saudi Press Agency referenced an "official source" in the ministry in confirming the decision to extend cuts implemented in July by another month.

"The source confirmed that this additional voluntary cut comes to reinforce the precautionary efforts made by OPEC+ countries with the aim of supporting the stability and balance of oil markets," the report added.

OPEC+ refers to the core group of the Organization of the Petroleum Exporting Countries and non-member state allies, such as Russia. Saudi Arabia is the de facto leader of the group and it needs oil priced above $80 per barrel to balance its books.

The price for Brent crude oil, the global benchmark, passed the $80 mark July 21 and has been rallying since. Brent was trading around 0.8% higher on the day as of 10:30 a.m. EDT to move within a few cents of $85 per barrel.

Supply-side pressures were widely expected during the second half of the year given the disciplined restraint from OPEC+, though it's largely been Saudi Arabia, and to a lesser extent Russia, doing much of the heavy lifting on curtailments.

Commodity prices had already increased this week in response to a dramatic drain in commercial crude oil inventories in the U.S. economy, the world's largest.

On Wednesday, the U.S. Energy Information Administration, the statistical arm of the Energy Department, reported domestic crude oil inventories fell last week by a staggering 17 million barrels, though storage levels are only 1% below the five-year average for this time of year.

Higher energy prices could undermine recent improvements in consumer-level inflation, particularly in a U.S. economy sensitive to retail-level gasoline prices.

Helima Croft, the head of global commodity strategy at RBC Bank, said the Saudi decision may be unwelcome at the White House.

"With concerns about retail gasoline prices rising again, the White House would certainly not welcome an additional one-month extension," she said in a statement Wednesday.

"Nevertheless, we do not think it would cause a serious rift; particularly if it is viewed as coming to an end before the leaves turn brown in the nation's capital."