On the evening of April 2, Saudi Arabia and other seven OPEC+ oil-producing countries suddenly announced voluntary additional production cuts. Russia also expressed its willingness to extend the previous additional production cuts until the end of this year. The voluntary additional production reductions of oil-producing countries have reached 1.649 million barrels per day .
Due to the intensive statements of oil-producing countries, market sentiment was significantly boosted. On April 3, oil prices jumped at the opening. WTI crude oil futures opened sharply higher by 6.4%, and then expanded to 7% within the day, directly rising by more than US$5 to US$81 / barrel above. NYMEX’s most active WTI crude oil main futures contract traded 10,134 lots within one minute at 06:00 on April 3, with a total contract value of 767 million US dollars. At the same time, Brent crude oil futures rose more than $6 to $86.44 a barrel.
On April 2, Saudi Arabia and other OPEC+ oil producers announced voluntary production cuts. Saudi Arabia said it would cut production by 500,000 barrels per day from May until the end of 2023. Meanwhile, the United Arab Emirates, Kuwait, Iraq, Oman and Algeria said they would voluntarily cut output over the same period. Superimposed on Russia’s previous voluntary production reduction of 500,000 barrels per day, the total production reduction is 1.649 million barrels per day, accounting for about 1.5% of global oil production.
In fact, Sunday’s move by the producers came a day before a meeting of the OPEC+ monitoring committee, an unprecedented way for the group to determine policy. As recently as March 31, delegates were privately saying they had no intention of changing their output limits. Therefore, this unexpected decision took the crude oil market by surprise. Regarding the original intention of the oil-producing countries to cut production intensively this time, the Saudi official has already responded. The Saudi Energy Ministry said the voluntary additional production cuts were a precautionary measure to support the crude oil market. That is to say, oil-producing countries believe that the current crude oil market still has potential downside risks, and implement support measures for oil prices in advance to prevent a new sharp decline in oil prices similar to that in mid-March in the future.
Essentially speaking, Saudi Arabia and other OPEC+ countries, as major oil-producing organizations, obviously need higher prices. Even though the mining costs in the Middle East are generally lower than other regions, oil exports, which are the country’s main source of finance, are more important. Therefore, , we can’t simply consider profit margins, but maintain fiscal balance. For Saudi Arabia, its fiscal balance oil price is around $65/barrel. This also means that if the international crude oil price falls below US$65/barrel, then Saudi Arabia will have a strong incentive to cut production to raise prices. The turbulence caused by the banking crisis in March caused oil prices to fall to the lows at the end of 2021. Although oil prices gradually recovered, oil-producing countries such as Saudi Arabia actively reduced production to support oil prices in order to avoid similar emergencies again. In addition, the Saudi leadership clearly has its own economic interests in mind when making oil production decisions. In the case of Saudi Arabia, which is embarking on a multi-trillion-dollar effort to transform its economy into a tourism hotspot, global logistics and business hub, government officials say they will use the surplus to help accelerate domestic investment. Therefore, the price of crude oil, which is the main source of income, is even more important.
A new round of OPEC+ meeting will be held on April 3, and the market generally believes that OPEC+ will maintain the previous official production cut of 2 million barrels per day. However, due to the impact of the voluntary production cuts by many countries, the wind direction of the international crude oil market has changed, and the optimistic sentiment has increased significantly. After Brent futures returned to the 80-85 range, there is still room for further upward movement.