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Oil prices climbed on Tuesday as the oil markets began to believe the narrative that oil could tighten in the second half of the year.
Brent crude oil climbed above $79 per barrel on Tuesday, the highest price in months for the international oil benchmark, although still off last year's prices by about $20 per barrel.
WTI prices reached $74.52 per barrel on Tuesday, an increase of $1.60 (+2.19%) per barrel.
Last week, Saudi Arabia announced that it was extending its 1 million bpd production cut into the month of August. It originally had voluntarily agreed to an extra million bpd for July only. Oil prices responded immediately with a 1% increase, and have increased since that time.
A few traders suggested the markets should have responded with a bigger bang, but skepticism about the market's fundamentals—like China's demand outlook—keep getting in the way of OPEC's price hike aspirations.
It's been a push/pull scenario with OPEC's production cuts on one side and China's demand picture on the other. Today, OPEC's cuts are winning. This is good news for Saudi Arabia, who put a lot on the line with the additional million bpd production cut this month and the extension into next month.
OPEC's heaviest hitter is counting on its cuts leading to an oil price rise this half of the year, banking on a tightening market—even if China's oil demand isn't as much as some would have liked it to be.
Saudi Arabia had the fastest-growing G20 economy last year, according to the IMF, but its economy could shrink this year 1% if it keeps its cuts in place. That is unless Saudi Arabia's plan is successful and prices continue to rise.
By Julianne Geiger for Oilprice.com
Julianne Geiger is a veteran editor, writer and researcher for Oilprice.com, and a member of the Creative Professionals Networking Group.