Saudi Arabia reversed a third of its production cuts

16 March, 2017

Oil tumbled during the trading session on Tuesday after OPEC reported that Saudi Arabia raised output while remaining committed to the quota determined at the last meeting of producers in November 2016. The OPEC leader’s decision reflected a desire to replenish its reserves, while the volume of crude oil supplied to the markets dropped by 90,000 barrels to a level of 9.9 million bpd.

Efforts to combat the glut in the market led Saudi Arabia to exceed its promises by cutting production by 700,000 barrels instead of the planned 300,000 barrels, in the hope that other producers will follow their example. However, Iraq, Russia and other major oil countries were in no hurry to trim production, promising that the process would be phased. Nigeria, Iran and Libya, on the contrary, added 200 thousand barrels per day to their global supplies, thus making an 80% reduction from the planned 1 million bpd.

The return of Saudi Arabia to an increase in production signals that the patience of the country is running out. By making a concession, the kingdom risks remaining the only loser, giving the opportunity to the US shale producers to increase production at a favourable price environment. Steadily growing stocks in the US indicate that the $50 mark is a brink for entry into the US oil industry, so OPEC is clearly aware that modest cuts in production won’t live up to the expectations. There are two options left: either to go back to price wars or to introduce more substantial quotas to limit production, which will be discussed at the OPEC meeting on May. Current quotas expire in June, and according to Saudi Arabia’s oil minister Al-Falih, the decision to extend the chosen strategy has not yet been adopted.

Yesterday’s API report on reserves reported a decrease, which allowed oil prices to recover after another collapse. Brent and WTI added about 1.5%, finding support by the weakening of the US currency as a result of the selloff before the FOMC meeting. Despite the fact that there was an increase in March that has been already priced in the markets, investors fear that Yellen may be vague on further growth prospects and on commenting on the number of future rate hikes. This is quite a wise move, as the Fed will analyse the incoming statistics to gauge the effect of the rise. The most likely scenario suggests that the FOMC will hike rates while saying that future raises will be data-dependent. The dollar will probably react with a recovery after the sell-off seen at the beginning of the week, however, the reaction will be moderate, and then go on playing out the incoming statistics. In the short term, the dollar may hold in the range of 101-102. However, conservative forecasts from the Federal Reserve may force the currency to go down.

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