Oil rises on back of production cuts, falling crude inventories

"The new year has really started with a bang for bullish traders as oil prices continue to grow on the back of Saudi Arabia’s promised production cuts, falling crude inventories in the US, and the latest political turmoil in the Capitol.

Most importantly, and something that the market can tangibly trade on, Saudi Arabia’s decision to cut output from February by a massive 1 million bpd is changing the global balances significantly already from Q1, swapping previously forecasted surpluses to deficits.

Saudi Arabia’s move has single-handedly lifted the oil market since Tuesday, but it also helped the country itself lift its selling prices.

The Saudis are taking advantage of their deeper cuts in February to raise their official selling prices for February loadings, raising them by more than the market expected prior to the announcement of the surprise supply cut.

Moreover, the lack of Saudi shipments is helping US crude storage levels drop, with a further decline in inventories expected going forward.

Yesterday the US democracy has been shaken to the core, which did create some limited concern about instability in the country. However we think that the markets will disregard the mayhem in Washington DC to a large degree, instead putting emphasis on tangible news droplets which influence fundamentals and prices.

The Democratic win in the Georgia senate run-off makes it more likely that the Biden administration becomes a full lame-duck, but can actually get things done. How prices will be influenced remains to be seen, but it seems the market believes a fiscal stimulus offsets harsher Covid-restrictions , and oil prices are understandably higher.

As Biden is now certified as the new President, the attention in the oil market will soon again revert to the US, especially the US tight oil outlook.

Amid the Saudi price cushion firmly offered to the competition, the industry is well placed for renewed growth from 2021. We would not be surprised to see the US shale machine churning out higher output in 2021 than most expect, even the Saudis.

However, the current price levels are built mostly as a result of a jaw-dropping promise of a single oil produce, Saudi Arabia. This fact on its own shows how fragile price levels are to a potential change of mind of a single country.

For more stability to come to the market the support to prices must not be artificial through supply cuts, but rather demand based, and that is likely to start happening form the second quarter of 2021 with the recovery cementing itself in the year’s second half."

Read the article online at: https://www.oilfieldtechnology.com/special-reports/07012021/oil-rises-on-back-of-production-cuts-falling-crude-inventories/