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They not only stopped a hike, but decided to go a step better: The Saudis’ surprise offer to cut 1 million barrels a day of their oil output in the next two months after convincing Russia not to raise its own production sent crude prices up 5% on Tuesday.
A day after starting 2021 on a weak note to extend last year’s declines, U.S. crude prices broke through the $50 per barrel resistance the first time in 11 months, resulting in a short squeeze in the oil trade as investors feared a supply shortage instead of more demand destruction from the fast-spreading U.K. variant of the coronavirus.
“The cut is the goodwill of the Saudi Crown Prince,” Saudi Energy Minister Abdulaziz bin Salman said, referring to his half-brother and heir-apparent to the Saudi throne — Mohammed bin Salman — who’s typically not shy of taking credit for the kingdom’s successes.
“We will support the market … we are the guardian of this industry,” the minister said, estimating that Saudi oil output will be at 8.125 million barrels per day on Feb 1, ahead of the planned 1.0-million bpd cut. A similar reduction had been planned for March, he added.
New York-traded West Texas Intermediate, the key indicator for U.S. crude, settled up $2.33, or 4.9%, at $49.93 per barrel. Its peak for the session was $50.20, the highest it has reached since February. On Monday, WTI fell almost 2% as trading for 2021 began, extending its 21% loss from last year.
London-traded Brent, the global benchmark for crude, was up $2.55, or 5%, to $53.64 by 2:40 PM ET (19:40 GMT).Crude prices began the year under pressure as the OPEC+ cartel — comprising the 12-member Organization of the Petroleum Exporting Countries led by the Saudis and 10 other oil-producing allies steered by Russia — was unable to agree to Moscow’s bid to raise output by 500,000 bpd.
Had the Russian gambit gone through, it would have been the second half-million barrels-per-day hike agreed to by OPEC+ in a month, after the group unanimously signed off on a 500,000 bpd rise in December for January.
Crude prices actually rose in December because the increase agreed to by OPEC+ was far below the 1.0-2.0 million bpd the market had feared. Such magnanimity would not have come from the market this time, especially when COVID-19 cases were rampaging all across the world, enabled by the U.K. variant of the virus.
The Saudis, however, appeared to have saved the day for the cartel, though analysts said it would take beyond spring to determine how well demand recovery was coping.“Demand is still about 78,000 million barrels a day, about 20% lower than what it should be,” said John Kilduff, founding partner at New York-based energy hedge fund Again Capital. “The demand number will be contingent on the virus situation, given that you have new lockdowns in the U.K., Germany and other places.”
Kilduff said he expected WTI to trade as high as $52 per barrel over the next four weeks and hold at or near $50 through the northern hemisphere winter, “before demand pressures surface”.
He also wondered how long the Saudis would be able to do unilateral production cuts to keep the market up and others in the OPEC+ group happy, pointing out just about a year ago, the kingdom was waging an all-out output war with the Russians in a campaign that sent WTI to its first-ever negative pricing in April.
Russian Energy Minister Alexander Novak on Tuesday described the latest Saudi oil cut as a “new year present” and that “the worst seems to be behind us”. Kilduff had his doubts: “Really, for the Saudis to make up the numbers for their budget, they are going to need oil trading again at $80 or more per barrel. Otherwise, something has to give, and it might again be the Saudi patience.”
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