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Oil rises on promise of more production cuts

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Oilfield Technology,

Oil prices rose this morning as Saudi Arabia’s move, accompanied by Kuwait and the UAE, to expand production cuts boosted the market’s confidence.

Rystad Energy’s Head of Oil Markets, Bjornar Tonhaugen, has provided the following comment:

"Oil prices are edging higher this morning and the reason is not coming from US after some time!

Instead it is Saudi Arabia and to a lesser extent Kuwait and the UAE that have promised to expand their oil production cuts commitment by above a million barrels per day combined.

This move should and is not been taken lightly by the market. More production curtailments is a positive indicator for the market, which receives the news as a slight relief to the oversupply it is facing.

It’s not that the new cuts are enough to rebalance it, far from that, they are however sufficient to bring the imbalance to more manageable levels in June and to most likely avoid hitting tank tops in onshore storage.

The new cuts, together with rapid shut-downs in production that we are observing during the last two weeks, seem to bring an end to one of the traders’ major headache, that of storage capacity.

Some weeks ago, the global storage was calculated to fill its nameplate capacity in the end of May. Now this possibility is most likely altogether distant.

It’s not that there is no storage issue still though, storages never fill to the brim, there is an operational capacity that they work with, which differs to the nameplate. The extra room is kept for emergencies and safety. And that operational level is still under threat.

All considered though, any day when production cuts are announced is a day celebrated in price gains and Tuesday could be no different. The market needed it, the market asked for it and the market got it. Prices rise on such news.

What no one wants to talk about today? The underlying possibility of a second wave of the pandemic, which traders feared of yesterday morning, based on new outbreak clusters around the world. If we go through a second wave, our demand revival forecasts need to be scrapped and an even larger crisis is around the corner.

But we are not there yet, traders are acting on happy news and they buy that extra oil barrel!"

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