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Oil Price Recovery Set To Continue After OPEC + Ministers Extend Production Cuts

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Oil Price Recovery Set To Continue After OPEC + Ministers Extend Production Cuts

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On Sunday the Saudis reversed their price-cutting strategy which commenced in March, when they announced the biggest increases in the price for its crude exports in at least two decades. The announcement further boosted the rally in oil prices a day after OPEC+ producers extended historic output cuts.

With China’s demand for crude once again rising, the Saudis are taking full advantage of the opportunity to raise prices. Overall, Aramco raised July pricing for all grades to Asia by between $5.60 and $7.30 a barrel, well above the expected increase of about $4 a barrel. Buyers of Saudi oil in the U.S., the Mediterranean region and Northwest Europe will also pay more for oil.

The price hike came the day after OPEC+ decided to extend production limits by one more month at almost the same level in order to further reduce the excess of global oil inventories, instead of tapering off output cuts as previously planned at the end of June. As Bloomberg notes, Aramco, which usually announces pricing on the fifth day of each month, had delayed announcing its July prices until after OPEC+ members made their decision.

In the aftermath of the pricing wars during March, in April the OPEC+ members agreed to cut production by up to 23%, resulting in the biggest output curbs in history as nearly 10 million barrels a day was taken off the market. At the same time, US shale production plunged by roughly 2 million barrels daily as low prices drove producers to shut wells.

As a result oil prices recovered in May, and Saturday’s OPEC+ decision to extend production limits through July will support that trend. Brent crude, while still down 36% this year, ended trading on Friday at more than $40 a barrel for the first time since March.

As oil prices continue to rise, American oil producers are recommencing production, even as they continue to put off most new drilling. The result will be a surge in new output which will reduce the impact from the OPEC+ output cuts, and may once again shift the equilibrium in the global oil market to one of oversupply if global demand falters.

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