Oil prices turned higher on Monday, erasing earlier losses after the world’s top oil exporter and OPEC leader, Saudi Arabia, said it would cut oil production by an additional 1 million barrels per day (bpd) on top of its promised cuts as part of the OPEC+ production cut deal.
As of 8:43 a.m. EDT on Monday, WTI Crude was up 2.02 percent at $25.18, and Brent Crude was trading up 0.97 percent on the day to $31.28.
Oil prices began Monday’s trading session in the red as the market began to fear that the eased lockdowns could lead to a second wave of COVID-19 cases, as some data in China, South Korea, and Germany could suggest.
By the early morning EDT, however, prices reversed their earlier losses and jumped after Saudi Arabia put out a statement saying that it would be significantly over-complying, again, with its share of the cuts in June.
Saudi Arabia’s energy ministry ordered the Kingdom’s oil giant Aramco to reduce its crude oil production in June “by an extra voluntary amount of one million barrels per day, in addition to the reduction committed by the Kingdom in the latest OPEC+ agreement,” the official Saudi Press Agency reported. Related: What’s Behind The Sudden Rally In Natural Gas?
Under the OPEC+ deal in effect from May 1, Saudi Arabia has pledged to cut its oil production to 8.5 million bpd.
With the voluntary additional reduction in June, the Saudis would produce 7.492 million bpd next month, according to a Saudi energy ministry official, cited by the Saudi Press Agency. The energy ministry is also ordering Aramco to seek further cuts to its targeted production of 8.492 million bpd for May, after consultations with its customers.
“The Ministry Official emphasized that the Kingdom aims through this additional cut to encourage OPEC+ participants, as well as other producing countries, to comply with the production cuts they have committed to, and to provide additional voluntary cuts, in an effort to support the stability of global oil markets,” Saudi Arabia said on the day on which it also announced ‘tough’ economic austerity measures as its oil revenues—the key source of budget income—plunged with the collapse in oil prices.
By Tsvetana Paraskova for Oilprice.com
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But Saudi Arabia shouldn’t worry much at the current level of oil prices since they are starting to trend upwards underpinned by the gradual easing of the global lockdown, the implementation of OPEC+-led production cuts and China’s bouncing back with its crude oil imports for the first four months of 2020 averaging 10.11 million barrels a day (mbd) and being even slightly higher than the same period of 2019. This strongly suggests that a recovery is underway.
Furthermore, there could neither be a global economy nor a modern civilization as we know and enjoy without oil and vice versa. The global economy operates on oil and will continue to do so throughout the 21st century and probably far beyond.
Saudi Arabia has the world’s largest fully integrated oil industry underpinned by very sizeable proven oil reserves and accounting for 11% and 12% of global oil production and exports respectively. With Saudi vision 2030 and its oil wealth, it has the making of one of the world’s most vibrant economies.
Geopolitically and economically Saudi Arabia could easily stand on its own feet without needing to lean on the United States. And contrary to claims by President Trump, he neither protects Saudi Arabia and its oil nor does Saudi Arabia need his protection. In fact, the United States needs Saudi Arabia far more than Saudi Arabia needs the United States.
If not for Saudi Arabia, the petrodollar which has been the core of the US financial system since 1973 might not have seen the light of day. Were Saudi Arabia to withdraw its support of the petrodollar and adopt the petro-yuan, it could seriously threaten the US financial system and the US economy. Saudi Arabia along with Russia and China account for 26% of global oil production and 52%% of globally-traded oil.
All it takes is for Saudi Arabia to focus all its energies on enhancing its economy, end its war in Yemen and involvement in Syria and Iraq and de-escalate tension with Iran and Qatar. It will be able to save hundreds of billions of dollars in arms deals with the United States and use the funds to support the diversification of its economy.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London