Saudis cut oil production – prices up

12.05.2020 10:49|Conotoxia Ltd Analyst Team

As the epidemic spread, economies were closed down to prevent further infections. People stayed at home and demand for oil fell dramatically. Attempts to reduce oil production were unsuccessful until unexpectedly Saudi Arabia announced a bold cut in production.

Today, as more and more economies in the world are lifting their restrictions and announcing further moves in this direction, demand for oil may slowly begin to recover. This, in turn, seems to stabilize oil prices, but at still very low levels compared to production costs. To balance Saudi Arabia's budget, the price of a barrel of oil would have to be at US$76. The closest thing to achieving this goal is Qatar, which would need an oil price of US$40.

The oil futures contracts increased on Tuesday to US$25,60, which was prompted by Saudi Arabia's unexpected commitment to deepen production cuts in order to reduce oversupply. At the end of March, the global oil supply was 99 million barrels of oil per day. In turn, demand was 10 million barrels lower, according to EIA data. Saudi Arabia announced that in June it will reduce production by another million barrels a day, reducing total production to 7.5 million barrels, almost 40% less than in April.

Such a reduction in production may encourage other OPEC+ members to adhere to the output reduction agreement and even offer additional voluntary cuts, which could accelerate the rebalancing of the oil market. The UAE and Kuwait have committed to reduce production by a further 180,000 barrels per day. Kazakhstan has also ordered producers to reduce oil production by around 22% between May and June, Reuters reports.

With oil maintenance costs falling in the form of reduced differences in quotations of subsequent series of futures contracts, the worst in the oil market may be over. Producers are adapting to the new reality and consumers may slowly return to the market, so the summer period may be favourable for the oil market.


Daniel Kostecki, Chief Analyst Conotoxia Ltd.

Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.

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