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Vladimir Zernov
Crude Oil

Oil Video 11.05.20.

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Saudi Arabia Will Cut Oil Production By An Additional 1 Million Barrels Per Day

Oil has recently received support from the report that Saudi Arabia will reduce its oil production by 1 million barrels per day (bpd) in addition to production cuts announced in the OPEC+ deal.

Saudi Arabia has the technological ability to quickly adjust its oil production, and it decided to use it to provide additional support for oil prices.

While the oil market has recovered in recent weeks, oil prices are still well below levels which can be seen as “healthy” by any oil producer. The front-month WTI June 2020 contract is trading close to $25 per barrel while longer-dated contracts are either below or close to $30 per barrel. Most other benchmarks experience similar pricing.

At this point, OPEC+ deal failed to provide upside for the oil market. The deal has certainly played a key role in market stabilization, but oil producers need higher prices so Saudi Arabia is trying to push prices higher and hopes that other oil producers will commit to additional production cuts.

However, the second biggest oil producer in the deal, Russia, is unlikely to cut production beyond the agreed amount as it risks losing some of its production permanently due to cuts.

Fears About A Second Wave Of Coronavirus Put Pressure On Oil Prices

On a regular day, the news about an additional 1 million bpd production cut from Saudi Arabia would have led to significant upside in oil. However, the markets are under pressure due to fears about a second wave of coronavirus as the economies start to reopen.

South Korea has recorded another outbreak tied to clubs and bars while new coronavirus cases were found in China’s Wuhan. Germany has reported an increase in new coronavirus infections after it started to lift lockdown measures.

At this point, the market consensus is that economies will gradually lift virus-related restrictions and demand for oil will improve. A potential second wave of the virus and the possibility of another set of lockdowns in Europe or elsewhere is certainly not priced in.

In the upcoming days, traders will pay attention to virus data from those countries who have started to reopen their economies. Widespread indications of a surge in new coronavirus cases can put additional pressure on oil despite the additional production cuts announced by Saudi Arabia.

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