Oil prices dropped more than 2% following a report that Saudi Arabia is prepared to raise crude production if Russia’s output significantly falls following European Union sanctions.
The Financial Times reported, citing sources, Saudi Arabia is aware of the risks of a supply shortage and that it is “not in their interests to lose control of oil prices.”
Oil prices fell in the morning of Asia trading hours. International benchmark Brent crude futures were down 2.6% to $113.29 per barrel. U.S. crude futures dropped 2.7% to $112.16 per barrel.
EU leaders on Monday agreed to ban 90% of Russian crude by the end of the year as part of the bloc’s sixth sanctions package on Russia since it invaded Ukraine. That initially sent oil prices higher.
Sources told the FT that Saudi Arabia, OPEC’s de facto leader, has not yet seen genuine shortages in the oil markets. It has so far ignored pressure from Washington to speed up production increases as oil prices soared this year.
But that situation could change as economies globally reopen amid the pandemic recovery, driving demand for crude.
That would include China, the world’s largest oil importer, where major cities are starting to ease restrictions as daily Covid cases taper off.
“Whilst it’s not an outright promise, Saudi Arabia [has] seemingly thrown the West a bone,” Matt Simpson, market analyst at U.K.-based trading platform City Index, wrote in a note following the news.
“This will be well received by Western leaders given inflation – and inflation expectations – remain eye wateringly high, and central banks try to raise rates at the risk of tipping their economies into a recession,” he added.
The FT report comes ahead of a monthly meeting of the OPEC+ alliance on Thursday, which Russia is a part of. Russia is the world’s second largest crude oil exporter behind Saudi Arabia.
At the same time, some members of OPEC+ are also considering whether to suspend Russia from an oil production deal, The Wall Street Journal reported, citing unnamed OPEC delegates.
The OPEC delegates are reportedly concerned about the growing economic pressure on Russia and its ability to pump more crude to cool soaring prices.