Will Oil Reverse the Larger Downtrend After the Sudden Cuts in Production?

US WTI crude Oil opened around $6 higher above $81 last night, after closing at $75.50 last Friday. The announcement of the oil production cuts by Saudi Arabia and other Gulf states will result in a reduction of approximately 1% of global Oil output, which is a significant swing in the physical market that was already expected to tighten in the summer. This move highlights the vulnerability of the US, which had unloaded about 1 million barrels per day for six months last year and into this year.

The fact that the announcement goes through year-end is particularly noteworthy, as it suggests a long-term commitment to reducing the global Oil glut which will send Oil prices higher. It also represents a rebuke to reports that the UAE was considering leaving OPEC, as their participation in these production cuts is notable.

The upcoming OPEC JMMC meeting was expected to discuss the oversupply of the Oil market and the need for action, although now that has been done. In any case, this announcement is likely to put a floor on this month’s Oil price decline, and it would not be surprising to see WTI crude oil prices form a support around $80. Russia announced 500k bpd through June but they’ve now extended that through year end. So all told, that’s nearly 1.7 million bpd.