Why Saudi's Production Cut Announcement Influenced Oil Prices

Last Monday, oil prices were observed soaring following Saudi Arabia’s announcement that it would be cutting its oil output by one million barrels a day in July.

The market forces came to bear almost immediately with the price of a barrel (159 litres) of North Sea Brent for delivery in August standing at 77.03 dollars on Monday morning and this price is about 90 cents more than what it was on Friday. 

Similarly, the price of a barrel of U.S. West Texas Intermediate for July delivery rose by 92 cents to 72.66 dollars.

Before now, prices had risen even more significantly at times overnight.

So in the wake of a meeting of the oil cartel OPEC+ last Sunday, Saudi Arabia announced plans to cut production following hours of negotiations.

The measure, which Riyadh said could be extended beyond July, comes as oil prices are on the decline due to a weakened global economy.

However, in contrast to the production cut plans by Saudi Arabia and other OPEC countries, the United Arab Emirates could raise its production to some extent in the coming year. 

With the benefits of hindsight, typical with these kinds of development is the fact that they come with mixed blessings that will leave some oil sector players smiling while others will not.

Moreover, while this trend is being keenly monitored, possible reasons for the price rise are evaluated below:

Rationalizing Rising Oil Prices

The announcement of Saudi Arabia's production cuts can push oil prices up for several reasons:

• Supply and demand dynamics: When Saudi Arabia, as the world's largest oil exporter, decides to reduce its oil production, it effectively decreases the global supply of oil. This reduction in supply creates a sense of scarcity, increasing the perceived value of oil. With less oil available in the market, the demand-supply balance shifts, and prices tend to rise.
• OPEC's influence: Saudi Arabia is a key member of the Organization of the Petroleum Exporting Countries (OPEC), which consists of major oil-producing nations. OPEC plays a significant role in coordinating and managing global oil production levels. When Saudi Arabia announces production cuts, it often signals a broader agreement within OPEC to reduce output. This unified action by OPEC member countries reinforces the impact on global oil supply and prices.
• Market confidence and sentiment: Saudi Arabia's announcement of production cuts can boost market confidence and investor sentiment. It indicates a proactive approach by major oil-producing nations to stabilize or increase oil prices. This can lead to increased investment and speculative buying, driving up prices further.
• Geopolitical factors: Saudi Arabia's position as a major player in the global oil market means its actions can have geopolitical implications. Any geopolitical tensions or conflicts in the region can influence oil prices. Therefore, when Saudi Arabia announces production cuts, it can mitigate concerns about oversupply, market volatility, or potential disruptions, thereby calming market sentiments and supporting price increases.
• Price manipulation and speculation: The announcement of production cuts by Saudi Arabia can also attract speculators and traders who anticipate rising prices. They may enter the market with buy orders, creating upward pressure on prices. Additionally, rumours and speculation about potential production cuts can circulate before the official announcement, influencing traders to position themselves accordingly, further driving prices up.

Conclusion

It is important to note that the impact of Saudi Arabia's production cuts on oil prices may vary depending on various market factors, such as global economic conditions, geopolitical events, and other supply and demand dynamics.

The oil market is complex and influenced by multiple variables, making it subject to fluctuations and unpredictability.