(News Bulletin 247) – Black gold contracts are moving up sharply on Monday as the world’s second largest oil producer decided to cut its production by around one million barrels a day.

“The icing on the cake”. This is how Prince Abdelaziz ben Salman, Minister of Energy of Saudi Arabia, according to AFP, qualified his announcement on Sunday. The leader indeed indicated at the end of the OPEC+ meeting, which brings together members of the Organization of Petroleum Exporting Countries (OPEC) and their allies led by Russia, that his country, the second largest oil producer in the world, was going to make further production cuts. This will decrease by 1 million barrels per day to drop to 9 million, starting in July and this for a month. This period may however be extended, said the Saudi Ministry of Energy.

In addition, the cuts instituted by nine other OPEC+ member countries in May for a total of 1.5 million barrels per day have been extended until the end of 2024.

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Crude up on Monday

“Saudi Arabia has kept its promise to keep prices stable. Just a few weeks ago, Saudi Arabia’s oil minister warned speculators to be very careful if they think they can get away with it in the short term. -circuiting [à la baisse, NDLR] oil prices,” said Naeem Aslam of Zaye Capital. “The oil country will not allow another episode of falling oil prices, and it kept its word yesterday,” he adds.

Riyadh’s announcement is enough to boost crude oil prices. Without making them go up to heaven. Around 10:10 a.m., the August contract on Brent from the North Sea rose 2.2% to 77.87 dollars a barrel while that for July on WTI listed in New York advanced 2.3% to 73, $38 a barrel.

This also has the effect of carrying oil and oil services stocks, particularly in Paris where TotalEnergies wins 1%, CGG advances by 2% while Vallourec gains 2.3%.

Riyadh’s desire to support prices will not necessarily be enough to create a real rise in oil prices, which have been weighed down for several weeks by fears about the economy, with in particular disappointing activity indicators in China.

“Investors expecting oil to rise have been betting heavily on Chinese demand, but in reality oil demand hasn’t really picked up, indicating that the global economy is still suffering from a number of Covid shocks. , such as rising inflation and the threat of a significant slowdown in economic activity,” observes Naeem Aslam.

Market share losses

“This very substantial drop in Saudi production will surely have a significant effect on prices in the short term, but in the long term everything will depend on the robustness of demand to maintain higher prices. So far demand has been rather wise, and the nature of the Chinese recovery has not yet stimulated, as expected, stronger demand”, considers for his part Sebastian Paris Horvitz, of La Banque Postale Asset Management.

Stephen Innes of SPI Asset Management stresses that the impact of the drop in Saudi production will also depend on its duration, “whether it lasts one or six months”, while the market is currently “fragile”. He thus considers that Saudi Arabia is giving a “lollipop” to the market so as to temporize until demand picks up again and stocks drop.

“In the short term, crude prices will largely depend on a test of will,” Bob McNally, chairman of consultancy Rapidan Energy Group and a former White House official, told Bloomberg. This battle will oppose on the one hand a Saudi Arabia anxious to stabilize the course and on the other traders playing the decline of the market, he adds.

In addition, and as Bloomberg points out, Riyadh’s decision has a price in the sense that it will result in market share losses to the benefit of two other major producers, namely Russia, which maintained its production on Sunday, and the Emirates. United Arab Emirates, which have obtained higher production quotas for next year.