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Vladimir Zernov
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WTI Crude Oil

Oil Video 07.01.21.

Saudi Arabia’s Production Cut And Crude Inventory Draw Support The Oil Market

Oil continues to move higher as traders are encouraged by Saudi Arabia’s decision to cut production by 1 million barrels per day (bpd) in February and March. Yesterday’s EIA Weekly Petroleum Status Report, which showed that crude inventories declined by 8 million barrels, also serves as a bullish catalyst.

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At this point, the key question is whether the current euphoria will be sustainable. Most likely, Saudi Arabia decided to cut production because it feared that demand would be much lower than expected while other countries were pushing for a production increase in order to increase their revenues.

Saudi Arabia has more room for maneuver compared to many OPEC+ members, so it decided that preserving cooperation within OPEC+ was more important strategically than trying to increase its own short-term profits.

The market is clearly applauding this decision but the longer-term fate of the current rally will still depend on the actual demand for oil.

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Coronavirus May Soon Get Back Into Spotlight

The current rally in the oil market may soon get tested by the worsening situation on the coronavirus front. The recent data shows that the number of new cases continues to increase in U.S., Brazil, UK, South Africa and other countries.

Importantly, China, which is the main driver of the oil demand rebound in the world, is currently dealing with a new coronavirus outbreak in the Hebei province.

China has already restricted movement in and out of the zone, but it remains to be seen whether the measures will be effective or the country will have to deal with a larger outbreak.

Any virus-related problems in China may have a very serious impact on the oil market because China (and Asia in general) is driving the current rebound. Some analysts suggest that Saudi Arabia’s decision to cut production was driven by weaker-than-expected demand from its Asian clients. If the situation in Asia gets worse, the oil market will find itself under pressure.

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

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