Oil Gains Ground As Traders Cheer Saudi Arabia’s Production Cut

Oil Video 06.01.21.

Saudi Arabia Decided To Cut Oil Production By 1 Million Barrels Per Day

Yesterday, OPEC+ managed to reach a compromise deal which will support the oil market in the next few months. Suddenly, Saudi Arabia decided to cut its production by 1 million barrels per day (bpd) in February and March.

Meanwhile, Russia and Kazakhstan will be able to increase their output by 75,000 bpd in February and 75,000 bpd in March. Other members will produce oil at current rates.

Obviously, Saudi Arabia’s decision is a major bullish catalyst for the oil market. The previous analyst consensus implied that OPEC+ production will stay at current levels in February and then increase in March. In reality, production will be cut significantly both in February and March thanks to Saudi Arabia’s decision.

Most likely, Saudi Arabia was worried about the strength of oil demand in the first quarter amid the second wave of the virus which turned out to be stronger than most analysts expected.

In addition, the world may have to deal with a new, more infectious strain of coronavirus which emerged in the UK and which has already been found in many countries.

In this light, Saudi Arabia’s decision may be a sign of the weak oil demand in the first quarter. Nevertheless, this significant production cut will provide WTI oil with a chance to settle above the $50 level and continue its upside move.

Crude Inventories Decline By 8 Million Barrels

EIA has just released its new Weekly Petroleum Status Report which indicated that crude inventories decreased by 8 million barrels. At this point, crude inventories are about 9% above the five-year average for this time of the year.

Meanwhile, gasoline inventories increased by 4.5 million barrels while distillate fuel inventories increased by 6.4 million barrels so the report was not that bullish.

The U.S. domestic oil production remained flat at 11 million bpd. The next several reports will be more interesting as they will show whether the U.S. oil industry reacted to higher oil prices.

All in all, crude inventories continue to move lower which is good for the market which is also supported by Saudi Arabia’s surprising production cut.

For a look at all of today’s economic events, check out our economic calendar.