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Oil prices continue rally after top crude exporter cuts output

Saudi Arabia said it will reduce production by 1 million barrels per day from July

Oil prices jumped on Monday after Saudi Arabia said it was reducing the amount of oil it delivered to the markets from July. Photo: Getty.
Oil prices jumped on Monday after Saudi Arabia said it was reducing the amount of oil it delivered to the markets from July. Photo: Getty. (Anton Petrus via Getty Images)

Oil prices continued to climb in morning London trade as investors considered the impact of Saudi Arabia's decision to voluntarily cut crude output by 1 million barrels per day from July.

At the time of writing, US crude oil, or West Texas Intermediate (CL=F), gained 2.54% to trade at $73.56 (£59.31) a barrel, while Brent crude (BZ=F) rose 2.31% to $77.89 a barrel.

Read more: FTSE 100 and European stocks higher as oil prices rise on Saudi supply cut

Goldman Sachs said the development could add some $6 per barrel, depending on how long the cut is kept in place.

“While the extra Saudi cut is worth +$1-6/bbl in terms of fundamentals, depending on whether the cut lasts 1-6 months, and strength in physical markets (borrowing a recession) should eventually boost positioning and prices, the delivery of Saudi’s first production cut within three months of a prior cut with stocks as low as today and the Saudi Energy Minister’s “whatever is necessary” (Draghi-like) quote signal the group’s commitment to continue to lean against the shorts and preemptively leverage its unusually high pricing power,” Goldman Sachs commented via Zero Hedge.

Bid to "stabilise" oil market

The announcement from top crude producer Saudi Arabia comes after OPEC+ members met in Vienna at the weekend and agreed to extend crude production cuts into 2024.

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The oil-producing group said in a statement that it was acting “to achieve and sustain a stable oil market,” and that it was continuing its recent approach of being “proactive, and pre-emptive.”

Naeem Aslam, chief investment officer at Zaye Capital Markets, said the latest crude production cuts will have the bulls celebrating.

“Saudi Arabia, which plays the most important role in the OPEC organisation, surprised the world yesterday by announcing a production cut of 1 million barrels and reducing its output from 10 million barrels per day to 9 million barrels per day. Basically, Saudi Arabia delivered on its promise that it was determined to keep prices stable.

“Only a few weeks ago, the Saudi oil minister warned speculators that they needed to play very carefully if they believed that they could get away with shorting oil prices. The oil nation will not allow another episode of a crash in oil prices, and yesterday they delivered on this,” he said.

Weakness in crude demand

Aslam further highlighted how it was important to pay attention to weakness in oil demand following the announcement.

“Oil traders have been thinking for some time that they will get to see a serious pick-up in oil demand as the world returns to normality after the Covid-19 crisis. Oil bulls have been banking big time on Chinese demand, but in reality, we have not seen a serious strength in oil demand, and this indicates that the global economy is still suffering from a number of Covid shocks, such as higher inflation and the threat of a serious slowdown in economic activity.”

Read more: Morgan Stanley Strategist Sees European Stocks Falling 10% This Summer

On the supply side, he noted, Saudi Arabia is setting an example for all other OPEC nations to do whatever it takes to keep oil prices stable.

“The fact that it is only Saudi Arabia that is cushioning all the supply cuts is a big deal, and it is more than likely that more future cuts may be announced by other OPEC nations as they have left the powder on the table,” Aslam added.

Watch: OPEC+ vows to slash oil production but will that equal higher gas prices?

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