- Saudi Arabia and Russia said they will extend oil supply cuts of 1.3 million barrels a day through December 2023.
- The Tuesday announcements sent prices of benchmark oil futures shooting to their 10-month highs.
- Analysts think inflation could stay at higher levels for longer due to the higher oil prices.
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Analysts think inflation could stay at higher levels for longer, after a decision by Saudi Arabia and Russia to extend oil production cuts until the end of this year sent prices soaring.
The two energy giants' plan to cut a collective 1.3 million barrels of oil per day sent Brent crude oil futures — the international benchmark — to hit their 10-month high above $90 a barrel. US West Texas Intermediate, or WTI, crude oil futures also hit a 10-month high.
Saudi Arabia and Russia said the supply cuts are aimed at maintaining stability and balance in the oil markets.
These unilateral supply cuts from both countries are outside the production policy of the Organization of the Petroleum Exporting Countries and its allies, or OPEC+.
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OPEC+ had last cut production in April for "the stability of the oil market."
"These bullish moves significantly tighten the global oil market and can only result in one thing: higher oil prices worldwide," Jorge Leon, a senior vice president at research firm Rystad Energy, wrote in a Tuesday note seen by Insider.
Leon said it is hard to predict the impact of these cuts on inflation and economic policy in the West, but said, "higher oil prices will only increase the likelihood of more fiscal tightening, especially in the US, to curtail inflation."
Higher oil prices are bad news for the world's central banks, which have been trying to tame high inflation since last year. Energy is a key input for economic activities, so higher oil prices generally lead to inflation.
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But Saudi Arabia and Russia's keeping their oil supply cuts for longer means "they have no interest in what central banks are worried about," Naeem Aslam, the chief investment officer of Zaye Capital Markets, wrote in a Tuesday note seen by Insider.
Saudi Arabia also has its own reasons to want to keep oil prices higher because it needs to pump in massive investment into the Kingdom's economic transformation project that is aimed at steering its reliance away from oil, Aslam added in his note.
As it is, world oil demand is "scaling record highs" due to strong summer air travel and power generation, according to the International Energy Agency in its August report. While the IEA expects global oil demand to hit 102.2 million barrels a day this year, supply has already fallen to 100.9 million barrels a day in July — indicating a shortfall.
Even so, oil price gains have so far remained muted this year due to concerns about major importer China's economic gloom. Brent futures are up about 5% this year while US WTI futures are up about 8% so far.
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Brent futures were flat at $90.04 a barrel at 12.16 a.m. ET on Wednesday after surging over 1.4% on Tuesday. US WTI futures were up 0.02% at $86.51 a barrel.
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