Why Saudi Arabia’s oil price is surging again

Oil prices rose again on Friday after Riyadh cut its output to protect its currency and support the kingdom’s struggling economy.

Saudi Arabia’s benchmark crude oil prices rose 3.4% to $45.75 per barrel, the highest in more than two months, after the kingdom said it will halt production in order to protect the kingdoms currency and to help stabilize its economy. 

The kingdom will cut output by 3 million barrels per day, the country’s oil minister said Friday.

Oil fell 1.7% to US$45.46 a barrel in Asia after Riyadh lifted its output. 

On Friday, Saudi Arabia announced it will cut production by 7.5 million barrels a day to help keep its economy afloat and curb a steep drop in the price of crude oil.

The kingdom plans to reduce production by 6 million barrels daily by June 30 and then cut production to 7 million barrels by June, a source with knowledge of the move told Reuters.

“The reduction in production will take place in accordance with the plan to reduce oil consumption, but not before June 30,” the source said.

In January, Saudi Aramco cut output to help support the countrys currency, the kingdom says it will boost production to support its economy in the face of an economic slowdown and the drop in oil prices.

But the cut will not come without risks.

Last week, the United Arab Emirates also cut output, saying it would stop production as well.

While Saudi Arabia is one of the world’s largest producers, it faces a massive oil glut that has led to an oil price collapse that has forced many oil-producing nations to cut production.

After the kingdom cut production last week, Saudi Arabian shares dropped 0.4%.

“There is no doubt that the Saudi government’s decision to reduce the oil production will be viewed as a severe blow to the kingdom and the economy, but I am not surprised by the Saudi decision,” said Peter Smith, managing director at Macquarie Capital.

It remains to be seen if the cutbacks in production are enough to stabilize prices or if they will result in the creation of new market distortions.

Even though the price drop has been steep, Saudi’s market shares are still below those of other OPEC members.

China is also struggling to contain its currency as the dollar, which has lost value in recent weeks, has gained about 5% against the greenback.

Despite the drop, Saudi has also announced it plans to increase production to keep up with the kingdom´s economic crisis.