Saudis Surprise Oil Market With Big Unilateral Output Cut

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(Bloomberg) — Saudi Arabia surprised the oil market with a large reduction in its output for February and March, carrying a greater burden of OPEC+ cuts while other producers hold steady or make small increases.

The kingdom will make an extra cut of 1 million barrels a day, said Saudi Energy Minister Prince Abdulaziz bin Salman. That more than offsets the combined 75,000 barrel-a-day increase Russia and Kazakhstan will be allowed to make in each of those months. The rest of the group will hold output steady.

“We do that with the purpose of supporting our economy, the economies of our colleagues in OPEC+ countries, to support the industry,” Prince Abdulaziz told reporters after the group’s video conference on Tuesday.

© Bloomberg Saudi Arabia’s surprise cut lifted crude prices to a 10-month high

The Saudi pledge makes for a tighter market than traders had been anticipating and sent crude surging to a 10-month high. It shows how worried the kingdom is about the impact of Europe’s resurgent coronavirus pandemic on oil demand, but also its determination to avoid a new price war with Russia.

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Both countries get at least part of what they wanted — the additional price support desired by Riyadh and the production boost Moscow had been pushing. Still, the contortions that were necessary to secure a consensus after two days of talks show the fragility of the alliance between the Organization of Petroleum Exporting Countries and other major producers.

The de-facto leaders of the group have different priorities, with Saudi Arabia preferring to sacrifice volume in exchange for higher prices, while Russia wants to boost production before rival suppliers can fill the gap.

Russian Deputy Prime Minister Alexander Novak welcomed Saudi Arabia’s move, telling reporters that “it’s a great New Year present for the whole oil industry.” It’s an especially sweet gift for U.S. shale drillers, said RBC analyst Helima Croft.

The agreement means the global market will get far less supply than traders had been expecting prior to this week. The OPEC+ meeting opened on Monday with a proposal from Russia for a 500,000 barrel a day output hike next month, which was opposed by most other members. The alliance had been scheduled to discuss similar-sized increases in March and April, but that plan has been superseded by the latest accord.

Oil prices surged, with West Texas Intermediate crude jumping as much as 5.4% to $50.17 a barrel in New York, the highest since Feb. 26.

(Updates with comment from Saudi energy minister in third paragraph.)

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