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Wednesday, July 17, 2024

Saudi, UAE lead Mideast oil production cut for market ‘stability’

Crude prices have come down over the past year as concerns about a possible recession caused by higher borrowing costs have offset supply worries sparked by sanctions on Russia over its invasion of Ukraine.

Oil prices soared Monday after top producers unveiled a shock output cut of more than a million barrels, while equities mostly rose after data showed US and European inflation eased further last month.

However, the decision by the OPEC+ cartel fanned concerns about a fresh spike in prices that could put pressure on central banks to push interest rates higher.

Both main crude contracts jumped almost six percent at one point following the cut by Saudi Arabia, Iraq, the United Arab Emirates, Kuwait, Algeria and Oman, which was the biggest since the group slashed two million barrels per day in October.

It came on top of a Russian decision to extend a cut of 500,000 barrels per day, and in spite of US calls to increase production.

A Saudi energy ministry official “emphasised that this is a precautionary measure aimed at supporting the stability of the oil market”, according to the official Saudi Press Agency.

Crude prices have come down over the past year as concerns about a possible recession caused by higher borrowing costs have offset supply worries sparked by sanctions on Russia over its invasion of Ukraine.

“The production cut, coming at a time of an uncertain global demand environment clearly shows OPEC was not happy with the movement in the oil price which had fallen over recent months,” said National Australia Bank’s Tapas Strickland.

Analysts said the decision could deal a blow to markets, which had rallied in recent weeks on optimism that the recent banking sector turmoil could force the US Federal Reserve to end its rate hike drive sooner than expected.

“For equity investors, this could be a rude awakening, as markets imply a Goldilocks outlook of reduced discount rates but no recession,” said Lazard Ltd’s Ronald Temple.

“The OPEC+ production cut is another reminder that the inflation genie is not back in the bottle.”

Still, the mood on Asian trading floors was upbeat, with most markets tracking a strong rally on Wall Street in response to news that US and eurozone price rises had slowed further.

The PCE Price Index, the Fed’s preferred measure of inflation, slowed to an annual rate of 5.0 percent in February from 5.3 percent in January.

Meanwhile, eurozone prices rose 6.9 percent in March, well down from 8.5 percent in February, beating expectations as energy prices eased.

In early trade, Shanghai, Sydney, Singapore, Manila and Jakarta all rose, though Hong Kong dipped after last week’s rally. Seoul and Wellington also slipped.

Tokyo rose despite the Bank of Japan’s closely watched Tankan survey showing confidence among the country’s largest manufacturers falling to its lowest level in more than two years.

However, US futures dipped as Treasury yields climbed on bets of further monetary tightening by the Fed.

Gulf oil giants Saudi Arabia and the United Arab Emirates led a coordinated cut in production by Middle East countries on Sunday, calling it a “precautionary measure” aimed at market stability.

Cuts by Saudi Arabia, the UAE and Kuwait totalling 772,000 barrels per day (bpd) will take effect from May and last for the rest of the year, they said in statements released by official media.

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Iraq followed suit while Algeria also announced a “voluntary” cut of 48,000 bpd over the same time-frame.

A Saudi energy ministry official “emphasised that this is a precautionary measure aimed at supporting the stability of the oil market”, the official Saudi Press Agency said.

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The cuts are on top of oil cartel OPEC’s controversial decision in October to slash production by two million barrels per day, the report said.

That reduction, the biggest since the height of the Covid pandemic in 2020, came despite concerns it could fuel further inflation and push central banks to hike interest rates even more.