Oil Prices Rise On ‘Surprise’ Saudi Production Cut, But Can The Rally Last?

Saudi Arabia surprised the oil market today when, after a day of tense negotiations with Russia and other oil producers, it announced that it will cut 1 million barrels per day of oil of its own production in the months of February and March. Other OPEC+ producers will continue at current rates, except for Russia and Kazakhstan, which will increase production slightly.

The decision looks an awful lot like the kingdom returning to its role as OPEC’s “swing producer.” In this scenario, other countries in the cartel increase their production rates or keep their production rates steady while Saudi Arabia alone decreases its production in order to keep a floor on oil prices. Saudi Arabia tried this strategy before, most notably under oil minister Zaki Yamani in the 1980s when the results did not favor the Kingdom. Not along ago, in 2014, Saudi Arabia made clear that it learned the lesson from the 1980s when oil minister Ali al-Naimi rejected the idea of unilaterally cutting production amid OPEC disagreement. In 2014, Naimi went the other direction and opened the Saudi taps, flooding the market with oil and crashing oil prices. Naimi knew that Saudi Arabia could not win by cutting production alone.

According to current Saudi oil minister Prince Abdulaziz bin Salman, the decision to remove 1 million bpd of Saudi oil from the market came from the Crown Prince. He said the move should be seen as a gift “to support the market.” However, it looks more like a capitulation to a Russian oil ministry that drove a hard bargain.

So far, the oil market has reacted positively to the news, although prices had been rising even before the Saudi oil minister dropped the news at the OPEC+ press conference this afternoon. Today, WTI briefly touched the $50 per barrel mark and Brent nearly sustained a 5% increase before retreating. However, there is little indication, if any, that today’s OPEC news will have a lasting impact on the oil markets that are driven by vaccine news and the optimism surrounding that. In fact, oil prices have been practically impervious to news of new or extended economic lockdowns in the United Kingdom, Germany, Italy, California and New York. If lockdowns in some of the world’s biggest economies do not shake the markets, there is no reason to believe the market will remember this OPEC decision for more than a moment.

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