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Oil Jumps 5% as Saudis Surprise With Output Cut

CommoditiesJan 05, 2021 03:35PM ET
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© Reuters.

By Barani Krishnan

Investing.com -  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 13-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 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.”

 

Oil Jumps 5% as Saudis Surprise With Output Cut
 

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Comments (8)
David Bennett
David Bennett Jan 05, 2021 7:11PM ET
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Trump victory tomorrow.
BOB MM
BOB MM Jan 05, 2021 4:23PM ET
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if you compare this trash article with the same fool writer's trash 24 hours ago, you will laugh on the floor. Just one day ago, this fool write about "COVID worries", "weak oil", "OPEC production hike" and even said "almost certainly deeper fall"... lol, after I saw it, I bought more oil because I knew oil will get big rally today
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Rusty Jabour
RBull Jan 05, 2021 4:23PM ET
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Barani Krishnan Thank you for your thoughtful and candid reply. I understand that supply cuts have a price effect, but they aren’t the same as true demand increases. I see this as a temporary “man-made” rebalancing effort rather than natural market forces at work. Likewise, we saw how the man-made surplus glut was caused by Russia and Saudi Arabia. True, naturally occurring market forces are not happening yet. I agree the pandemic suppressed oil’s recovery that was underway until early June when the second Covid wave hit. Oil has not had a normal market since last February.
Barani Krishnan
Barani Krishnan Jan 05, 2021 4:23PM ET
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Rusty Jabour  This is what I call logical thinking -- not something fools like BOB MM are capable of.
BOB MM
BOB MM Jan 05, 2021 4:23PM ET
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Barani Krishnan   Don't you feel any shame about saying "logical thinking"?? Just go back to review your trash articles in the last couple of months. Always the same template, same trash words repeated again and again. If you know little real knowledge about oil market, you will not tolerate these B.S. yourself. The most *****"analyst" I ever seen. I'll continue to humiliate your trash articles in the future.
Barani Krishnan
Barani Krishnan Jan 05, 2021 4:23PM ET
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BOB MM  You have a garbage bin for a brain, and you have the nerve to comment about me? Just read all the ba.nal comments you've been making on your history of commenting and had a good laugh. You have zero understanding of oil's fundamentals, other than to follow the herd when it's long and lick your wound.s when the trade goes against you. You know nothing barrel economics yet you have a big mout.h all because of herd-following. You must understand that no amount of trying to sound intelligent on your part  i.e. suggesting that I looting (where did you copy all that from, huh?) help makes you intelligent. Got it?
Barani Krishnan
Barani Krishnan Jan 05, 2021 4:23PM ET
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BOB MM  Repeating last bit swallowed by the system: You must understand that no amount of trying to sound intelligent on your part  i.e. suggesting that I learn chart, tracking trend, option pricing, implied volatility, straddle pricing, quantitative analysis and technical analysis (where did you copy all that from, huh?) help makes you intelligent. Got it?
Alan Rice
Alan Rice Jan 05, 2021 3:57PM ET
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Are the Saudis seeing "it" yet ?? Tic-toc.
Barani Krishnan
Barani Krishnan Jan 05, 2021 3:57PM ET
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You will have to wonder, Alan.
ATUL BARIDE
SecondWise Jan 05, 2021 3:35PM ET
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Game being set up for President Trump
Thunder Twentyone
Thunder21 Jan 05, 2021 3:16PM ET
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Good lets get it back up to 80, so I can get back to work on a regular basis
David Bennett
David Bennett Jan 05, 2021 3:16PM ET
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yes.
Alan Rice
Alan Rice Jan 05, 2021 3:16PM ET
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$160 would be better.
pierric clot
pierric clot Jan 05, 2021 3:09PM ET
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How come this not being in the calendar?
Barani Krishnan
Barani Krishnan Jan 05, 2021 3:09PM ET
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It was a calendar event, Pierric
Mojo Snake
Mojo Snake Jan 05, 2021 3:08PM ET
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As soon as BiteMe gets into office, he will destroy our energy independence and we can look forward to $5 gas again with these sand jockey criminals controlling the production.
Matt Novakovich
Matt Novakovich Jan 05, 2021 3:08PM ET
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Yes please
Andrew Bauer
Andrew Bauer Jan 05, 2021 3:08PM ET
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Right, Biden phasing out oil means less supply BINGO
Barani Krishnan
Barani Krishnan Jan 05, 2021 3:08PM ET
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Andrew Bauer  You guys seriously are forgetting the whole Iran equation. The Saudis will have to keep cutting and cutting and cutting, while admonishing and wagging their royal finger at the Iranians, Libyans and rest who keep pumping, pumping and plumbing:). Barring an unseen event, I still expect more oil than demand in 2021 -- not less.
Gamer Turtle
GamerTurtle Jan 05, 2021 3:05PM ET
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guardian of this industry = price fixing with other producers to ensure your own profit and control over the sector? i need a new dictionary, mine seems to be outdated.
Brook Buck
Brook Buck Jan 05, 2021 3:05PM ET
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yeah no more cheap oil
 
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