Saudi Arabia to Cut Production, Likely Ending Drop in Oil Prices

The unprecedented drop in oil prices may be over. A bear market dropped the price of crude from $76 to $60 in one month. Much of the cause was an oversupply of oil. Saudi Arabia, one of the world’s largest producers, said it would cut output, almost certainly a catalyst for an oil price rise.

Khalid Al-Falih, the Saudi oil minister, told the press that the kingdom would drop production because of lower global demand. However, the reason may not be an accurate one, based on research about the market. Nevertheless, Al-Falih said: “The consensus among all members is that we need to do whatever it takes to balance the market. If that means trimming supply by a million [barrels per day], we will do it,” according to CNN. A cut as early as this year could chop production by 500,000 barrels a day, based on educated speculation.

The Saudi cut may not have the desired effect. The balance of OPEC members may not follow the Saudi plan. Russia also could keep production high. The United States has contributed to rising supply because of its huge shale fields, which also extend into Canada.

The International Energy Agency, which offers global supply and demand numbers once a month, reported in its Monthly Oil Report that both supply and demand were close to all-time highs as each reached 100 million barrels a day. Its experts said sanctions against Iran could cause a drop in supply. As it forecast ahead, its experts wrote:

Recent production increases come at the expense of spare capacity, which is already down to only 2% of global demand, with further reductions likely to come. This strain could be with us for some time and it will likely be accompanied by higher prices, however much we regret them and their potential negative impact on the global economy.

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The U.S. Energy Information Administration (EIA) recently reported that energy prices would swing primarily on demand from China, India and Africa. Near-term gross domestic product growth of the regions varies. While China’s is slowing, India’s remains the fastest growing large economy in the world. African demand is hard to gauge because of the number of countries.

On balance, a Saudi cut in production should push oil prices up, especially if many global producers follow.

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