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Oil surges to 11-month high after Saudis agree to surprise output cut

Kumutha Ramanathan
·Contributor
·3 min read
Oil prices jumped as Saudi Arabia agreed to an output cut. Photo: Getty Creative
Oil prices jumped as Saudi Arabia agreed to an output cut. Photo: Getty Creative

Oil prices rose dramatically on Wednesday, with Brent (BZ=F) hitting a peak last seen 11 months ago, after Saudi Arabia surprised the market by agreeing to make bigger output cuts than expected.

The net result of this decision is that the group’s output in the first quarter will be significantly lower than what was expected after the December Organization of the Petroleum Exporting Countries and its allies (OPEC+) meeting.

“The decision came as a huge surprise as the organisation struggled yesterday [Monday] to agree to a deal,” said Capital Economics in a note. “The Saudi Energy Minister justified the decision on the grounds that the near-term oil demand outlook remains very downbeat due to virus-containment measures. Meanwhile, today’s [Tuesday] agreement also raises the probability that OPEC+ cuts will be higher than 5.7m bpd in Q2.”

Watch: Saudi Arabia and allies to realign with Qatar

Brent (BZ=F) rose 0.4% at around 8.43am in London, sitting at $53.82 (£38.85) per barrel.

Brent hit an 11-month peak on Wednesday. Chart: Yahoo Finance
Brent hit an 11-month peak on Wednesday. Chart: Yahoo Finance

The standalone crude price fell 0.3% at around 9.05am in London, at $49.77 a barrel.

The crude price has been falling slightly on Wednesday. Chart: Yahoo Finance
The crude price has been falling slightly on Wednesday. Chart: Yahoo Finance

The move by Saudi Arabia, the group’s de-facto leader, means other producers will keep supplies stable. Russia and Kazakhstan will also lift their output by a combined 75,000 barrels a day in February and March.

Industry data from the American Petroleum Institute from Tuesday revealed that US crude oil inventories dropped by 1.7 million barrels in the week to 1 January to 491.3 million barrels, thus helping push prices even higher.

READ MORE: European markets brace for new lockdown measures and potential US Democratic sweep

Saudi’s commitment to lower output, which Russia’s deputy prime minister called a “new year gift” to the oil market, follows increased restrictions being put in place globally as many nations continue to struggle to contain the COVID-19 pandemic, especially as new, more transmissible strains become apparent.

After a brief relaxation of coronavirus restrictions over the holiday season, the UK and its continental peers are putting tougher regimes in place. The UK has now entered its third lockdown, France lifted its second national lockdown on 15 December but has extended a nationwide curfew. Finally, Germany is in its second lockdown, which is also expected to be extended until the end of January.

As such, travel will be curtailed, making the need for gasoline-fuelled transportation, such as cars and airplanes, not as necessary.

With the Saudi kingdom and its peers concerned about demand over the long-term, the “decision adds weight to [Capital Economics’] view that the oil market will be in a deficit throughout 2020, which will help lift the price of Brent to $60 per barrel by end-year.”

The next OPEC+ meeting is now scheduled for March, rather than February, where the group will decide on its April output.

Watch: What’s in store for oil prices in 2021?