Oil prices rallied on Monday after Saudi Arabia said it would cut oil production by an additional one million barrels per day.
As of 8:43 on Monday, WTI Crude was up 2.02 per cent at $25.18, while Brent Crude traded at $31.28, up 0.97 per cent.
Saudi Arabia’s new plan is coming against the background of Riyadh’s promised cuts made earlier as part of the OPEC+ production cut deal.
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 waveof COVID-19 cases.
There had been reports in the media suggesting that data in China, South Korea, and Germany point towards a second wave of the deadly virus.
But on Monday morning, however, prices reversed their earlier losses and jumped after Saudi Arabia put out a statement saying that it would be complying, yet again, with its share of the cuts in June.
According to the official Saudi Press Agency, 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”.
Under the OPEC+ deal in effect from May 1, Saudi Arabia has pledged to cut its oil production to 8.5 million bpd.
In April, Saudi intentionally flooded the market with oil in the midst of an epic price war with Russia, sending prices tumbling.
But 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.
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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 emphasised 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.
The new decision would leave Saudi Arabia’s daily output at just 7.5 million barrels, down 39 per cent from what the output figures were in April.
Analysts say that the latest production cuts underscore the intense pressure the oil crash has put on the Middle East nation’s budget.
Saudi Arabia needs oil prices to more than double to balance its vast budget, which includes heavy social and military spending.
On Monday, hours before detailing the production cuts, the kingdom announced new steps aimed at plugging gaping holes in its budget, including tripling its value added tax.
“They need to get prices higher and stabilize the oil market because that’s their ATM,” Helima Croft, head of global commodity strategy at RBC Capital Markets, said.
Other oil producers, including Nigeria, remain optimistic that the new cut deal could affect oil prices positively in the international market.
The COVID-19 pandemic has resulted in reduced demand for crude oil across the world, amid supply glut occasioned by lockdown orders in strategic cities of the world.
Earlier in March, Mele Kyari, Group Managing Director (GMD) of the Nigerian National Petroleum Corporation (NNPC), said that Nigeria had about 50 cargoes of its crude oil stranded in the international oil market with no buyers snapping up the cargoes.
Last month, a report by Wall Street Journal said that an estimated 84 million barrels of Nigerian crude oil were stranded at sea.
In an April 27 report, the newspaper said cargo ships filled with Nigerian crude had nowhere to go and Nigerian oil companies were competing to fill the “last few empty tankers still left at sea”.
Nigeria has had to adjust its budgetary projections and revenue expectations as part of its policy response against the coronavirus pandemic and its effect on the global economy.