Yahoo Finance How Saudi Arabia is throwing its weight around in oil markets today
This may be the beginning of a stabilisation in the oil market after crude prices crashed by about 20% since early October.
Saudi Arabia’s energy minister Khalid al-Falih seemed to have stopped the bleeding in the markets on Monday, saying the oil cartel OPEC and its allies agree there’s a need to cut oil supplies next year by around 1 million barrels per day against October levels to balance out supply and demand. This comes after Saudi Arabia said on Sunday it would cut its oil exports by 500,000 barrels per day next month due to lower demand.
Crude oil prices began to rise on Monday by more than 1%. WTI crude prices were trading at about $61 per barrel and Brent crude at $71 per barrel. This comes after prices fell for 10 consecutive days, a trend not seen since the 1980s, according to oil analyst Spencer Welch at IHS Markit.
Saudi Arabia is the largest oil exporter in the world and the de facto leader of OPEC, a powerful group of 15 countries that coordinate their oil production levels in an effort to control global prices. Russia, another major producer, has also been coordinating with OPEC on output levels.
Global oil producers – including OPEC and Russia – pump out roughly 100 million barrels of oil per day, so a 1% cut in production might not seem like a big deal. But even just signalling that producers could cut production by 1% can make a huge difference in energy markets and beyond.
“Supply is about 100 million barrels a day and demand is about 100 million barrels a day … Every small imbalance in percentage terms can lead to wild price swings,” said Robert McNally, president of Rapidan Energy Group.
McNally said it was important for Saudi Arabia to signal to the markets that a production cut was coming as traders worried about a build up in excess supplies.
“If they don’t get ahead of the game … those [global oil] inventories will rise and the price will fall like a rock,” he said.
Oil prices have fallen roughly 20% in the last month, driven lower by a rapid increase in global supply and the threat of a slowdown in demand – especially from countries such as India, Indonesia and China, whose currencies have weakened against the dollar and eroded their purchasing power.
One of OPEC’s biggest problems right now is the surge in US output, as small producers across the country increase production levels.
“Regardless of what OPEC is doing, the US is ramping up production as fast as it can,” said Welch.
US production has more than doubled over the last decade and surpassed 11 million barrels per day this summer. The vast number of small producers across the US do not coordinate their pumping.
Saudi Arabia pumps about 10.4 million barrels of oil each day, with production decisions set at the national level and in coordination with OPEC.
Russia pumps more than 11 million barrels per day.
With files from Reuters
