Saudi Arabia, oil market flexible muscle, promises to cut production sharply to raise prices

Oil prices, which had already risen sharply on news of the OPEC-plus deal, rose sharply on Saudi announcement. In early trading Tuesday afternoon, West Texas Intermediate, the U.S. benchmark, futures rose 5.2% to $ 50.11 a barrel, going through the $ 50 mark for the first time since February last year. Brent crude rose 5.2% to $ 53.70 a barrel.

Saudi Energy Minister Abdulaziz bin Salman said the unilateral move was made “with the purpose of supporting our economy, the economies of our friends and colleagues, the OPEC-plus countries, to promote the industry. ”

It is far from clear whether the steep cut will keep prices up as virus cases escalate rapidly in many parts of the world, leading to new economic constraints. For now, however, the move sent a stronger-than-expected message from the world’s most flexible producer that it promised to keep prices vibrant.

While it benefits oil-dependent countries such as Saudi Arabia, the re-pricing is also good news for a low-energy energy industry with the pandemic that demands demand. Oil giants introduce Exxon Mobil Corp.

and Royal Dutch Shell PLC has scrapped major writing, cut jobs and reduced spending plans to adjust for a period that was similar to low oil prices. Shell and BP PLC cut their gains for the first time in years.

In the last few months, however, prices have started to bounce back stronger than expected. Many economies in Asia, especially China, seemed to be behind the pandemic. Several Western vaccines have been approved for use, raising hopes that governments there could help reduce the spread of the virus, too, as economies decline again.

The companies most likely to benefit from higher stable prices are U.S. coal shale producers that can ramp up production up and down. If oil prices remained firmly above $ 50 a barrel, shale companies would spend around $ 62 billion this year on oil and gas production, about 11% more than they would have spent if prices had risen. the mid- $ 40 range, according to consulting firm Rystad Energy.

Recently, however, producers large and small have been watching warmly as virus cases rise in the U.S. and Europe and vaccination efforts, at least in the West, have shifted more. slower than many expected. A new version of the virus, first identified in the UK, has raised the above and has since been identified in many other countries, including the USA

Saudi Arabia’s move comes after it suspended some of its oil market situation to Russia. The two have had a long cold relationship working together to keep prices stable. In the last few months, Russia has demanded that it be able to open its taps, for fear of losing market share to shale producers. Saudi Arabia pushed for a more cautious move.

Christyan Malek, head of oil-and-gas exploration at JP Morgan, said the Saudi cut could hurt the nation’s market share in the short term, but also stressed its unparalleled ability to turn quickly and away from the spigot to move prices. “A small cut is no longer a big issue,” he said. “A little pain for a big gain later.”

Earlier on Tuesday, an informal group of some of the world’s largest oil producers agreed to keep oil production combined at normal levels through February, warning of higher risks to global economy – and oil demand – from regenerative coronavirus.

In a statement Tuesday ratifying the treaty, the coalition, which includes a 13-member Group of Petroleum Exporting Countries and a group of 10 Russian-led representatives, said, “diseases rising, the return of tougher locking measures and growing uncertainty. more fragile economic recovery. ”

The group has said it is finally promising to return nearly 10 million barrels per day – or about 10% of global pre-Covid-19 demand – of production it cut at the start of the project. pandemic to stable prices. But so far it has reversed just 2.5 million of those cuts. In the last few months, it has been reported that further production renewal would take much longer than expected.

The OPEC-plus contract was not easy. He publicly maintained that Russia wanted permission to open its own taps to protect market share. OPEC-plus said that Russia and Kazakhstan, which had both maintained total group production, would be allowed to increase production by 75,000 barrels per day in February and then another 75,000 barrels per day again in February. March.

The monthly share – accounting for just 0.075% of global demand 2019 – was interpreted by markets as a face-off discount for Russia. Saudi Arabia, meanwhile, told delegates that they would agree to compensate for the small increase by deepening their own cuts, meaning the group as a whole would not raise production, according to representatives. But the kingdom has not indicated to OPEC colleagues or to Russia the extent of its compensation cut.

At the height of last year’s coronavirus revolution, OPEC-plus agreed to cut production by 9.7 million barrels per day and planned to put it back in levels of 2 million barrels per day assuming no return request. In the summer, the group moved to return the 2 million barrels, and last month agreed to add an additional 500,000 barrels per day in January.

Russia was initially opposed to maintaining normal yield levels and had pushed for an increase of another 500,000 barrels per day for February, according to representatives familiar with the debate. Moscow argued that oil demand would return as vaccination programs around the world begin to make teeth in the pandemic, representatives said.

But Saudi Arabia and most other producers wanted the current production restrictions to be extended, said people familiar with their idea, concerned about the return of locksmiths and what they were doing. considers the slow release of vaccines, according to officials familiar with the debate. Algeria, for example, was pushing for their maintenance until the end of March, they said.

—Collin Eaton in Houston contributed to this article.

Write to Summer said at [email protected] and Benoit Faucon at [email protected]