Saudi Arabia Cuts Oil Production, What's Next For Oil Prices?

OPEC logo with a oil pump jack in front of it
Credit: Dado Ruvic - Reuters / stock.adobe.com

Saudi Arabia announced another voluntary oil reduction of one million barrels per day yesterday, sending a clear message to market participants that the cartel is serious about preserving oil price stability, and it will go to any length to do it. However, there are some traders who feel that the increase in oil prices is merely short-term, and short prices since they anticipate this rally will burn out fast. Who's right? Here are some of the variables behind the current price movement that traders should be aware of.

Background on oil prices

Oil prices have been trading in a narrow range for the previous several months, with most of the pressure coming from the downside. Oil prices started the year at $80, and it has yet to reach the high of $131 which it attained in March of last year. There is a greater likelihood that oil prices will remain below $100, despite the fact that one of the factors that drove oil prices over the top is still very much in play -- the war between Ukraine and Russia. This is taking place while the world is experiencing greater inflation.

Of course, most of this is also due to the Covid crisis, which saw massive supply chain issues and caused central banks throughout the world to lower interest rates, which fueled inflation and resulted in a significant slowdown in global economic activity. Investors are anxious about the continued economic downturn, and traders feel there is a clear relationship between oil consumption and global economic development.

Saudi Arabia, a key OPEC member, warned speculators last month that they should reconsider their approach if they believed that OPEC would allow oil prices to drop further. When the global economy came to a halt during Covid, oil futures contract prices fell into negative territory for the first time, and OPEC was relatively slow in controlling the supply and demand balance. However, oil countries are now active in the market, and when oil prices fall below a particular level, they interfere with significant measures rather than mere warnings.

Saudi Arabia announces another cut

Saudi Arabia, the cartel's largest oil member, announced a voluntary cut in oil output yesterday. Saudi Arabia was producing 10 million barrels per day until yesterday, and it will now reduce output by one million barrels per day beginning in July. This implies that another million barrels of oil will exit the market, and oil prices will regain the ground they lost owing to weaker economic development.

What was particularly remarkable this time was that Saudi Arabia alone bore the brunt of the oil output drop. In general, there is usually some disagreement among members, and major players put pressure on weaker players to carry the burden, and there are usually certain concessions made for nations that are permitted to maintain their production levels.

But this time, Saudi Arabia skipped that game entirely, sending a message to the market by taking the whole cut. What is important is the tone of this warning, which plainly states that traders who intend to short markets must exercise extreme caution.

Will oil prices continue to move lower?

Traders predict that the increased price of oil will keep global inflation extraordinarily high. Saudi Arabia's move to reduce oil output will boost inflation while making it more difficult for central bankers to combat inflation. Because inflation has been so stubborn, the U.S. Fed is expected to hike interest rates again this month. This might stall the economic recovery even more, putting pressure on oil demand. The bulk of bears are concentrating their efforts here, believing that the current rise will shortly flatten out and that the path of least resistance remains significantly biased to the negative.

OPEC's sensitivity levels

In terms of OPEC’s reaction, anything between $65 to $60 is more than likely to bring more comments from oil nations. If the crude oil prices begin to flirt with the $50 handle, we are highly to see another oil production cut.

Final thoughts

When it comes to oil prices, traders and speculators must continue to pay close attention to their tactics, which are now being impacted negatively by the economic crisis and surging inflation. The Fed is under pressure, and it seems probable that interest rates will be raised this month. If they do, the U.S. economy could face even greater challenges, and suggests that oil prices may begin to fall again, but traders should remain mindful of OPEC's active role in the market.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Naeem Aslam

I am a former Hedge Fund Trader with over 15 years of experience in investment banking. During my early career, I was awarded a national award (Young Irish Broker) in 2010. Over the years, I have worked with Bank of America in equity trading and with Bank of New York in hedge fund trading. I specialize in Blockchain technologies (cryptocurrencies and digital assets) and Sustainable Investments. In my career thus far, I have also extensively covered Equities, Commodities and Forex.

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