Oil dips with doubts surfacing over Saudi Arabia production cuts

Oil declined as doubts circulated over Saudi Arabia’s ability to implement additional pledged production cuts.

Futures in New York dropped 2.4% Monday following a morning rally. Saudi Arabia said it will pump 7.492 million barrels a day next month, about a million barrels below its official OPEC+ output target. That would be the lowest level since mid-2002, according to data compiled by Bloomberg.

“While Saudi is undoubtedly the market’s swing supplier, delivering such a volume turnaround in the space of only a couple of months is a tall order,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA.

The UAE also announced an additional 100,000 barrels per day of cuts for June. The curtailments have added to the unprecedented output cuts the Organization of Petroleum Exporting Countries and its allies embarked on May 1 in response to the coronavirus pandemic, which has crushed consumption.

Questions remain over the timing of a strong pick-up in demand. China has seen a steady recovery in air travel and traffic in its capital city, but in Europe various degrees of lock-down continue to hobble fuel demand. In the U.S., an OPIS report showed that the volume of fuel sold by retailers across the nation rose just over 7% during the week ended May 2. However, the rebound is still far below 2019 levels.

“If somebody wanted Saudi’s oil, they would produce it,” said Michael Hiley, head of over-the-counter energy trading at LPS Futures. “The reverse logic is because they are willing to cut another million, it means they don’t have buyers for that million, so what appears to bullish is actually bearish.”