Question

Saudi ends voluntary output cut as oil prices rebound

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Saudi Arabia will boost output in July to match its Opec quota while ending voluntary deeper cuts as it sees need for more oil at home amid signs of global demand recovery, the Saudi energy minister said on Monday.

Market sources expect the UAE and Kuwait will also follow suit by not extending beyond June their voluntary additional oil output cuts of 1.180 million barrels per day.

Opec+ alliance, including Russia agreed on Saturday to extend production cuts of 9.7 million barrels per day until the end of July, curbing global supply by almost 10 per cent.

For June, Saudi Arabia, Kuwait and the UAE had pledged to cut by 1.18 million bpd on top of that, with Riyadh forfeiting an extra one million bpd.

Saudi Energy Minister Prince Abdulaziz said that this would not continue in July, when Saudi Arabia will pump its Opec quota.

"The voluntary cut has served its purpose and we are moving on. A good chunk of what we will increase in July will go into domestic consumption," Prince Abdulaziz told a virtual news conference.

Following Opec+ agreement to extend the cuts to the end of July, oil climbed on Monday as China's crude imports hit an all-time high in May.

Brent crude was up 50 cents, or 1.2 per cent, at $42.80 per barrel, by 0840 GMT, while US West Texas Intermediate (WTI) crude rose 31 cents, or 0.8 per cent, to $39.86 a barrel.

Analysts said low prices have drawn Chinese buyers to boost imports. Purchases by the world's largest crude importer rose to an all-time high of 11.3 million bpd in May.

But consultancy JBC Energy warned higher prices could discourage buying and undercut a fragile demand recovery.

"We cannot shake the feeling that, price-wise, this market has gotten a bit ahead of itself and will need a good confluence of bullish surprises to continue in order to maintain current pricing levels," JBC said in note.

Oil market analysts said the extension of the output cuts is a victory for Saudi Arabia and Russia, which were deadlocked in a price war just two months ago.

"Opec+'s de-facto leaders showed their commitment to shore up oil markets globally, and even cajoled Iraq, Nigeria and other laggards to fulfill their promises to reduce production. Following the meeting, Opec's largest producer sharply hiked its official selling price," said analysts at WorldOil."

The supply cuts and a rebound in demand have helped oil prices double since April. China's crude imports surged to a record high last month, while consumption in other major economies such as India is improving. Still, a sustained rebound in prices may be hampered by deteriorating relations between Washington and Beijing, a second wave of infections, or returning US shale supply, said the analysts.

Even as oil prices recovered, they are still well below the costs of most US shale producers, leading to shutdowns, layoffs and cost-cutting in the world's largest producer.

The number of operating US oil and natural gas rigs fell to a record low for a fifth week in a row in the week to June 5, according to data from Baker Hughes Co.

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Required Question:  Analyze the Article related to Demand and Supply The use of graph and diagrams are preferred to explain theories.

Answer 1

If we carefully read the above scenario, we can infer a few things. There are two timelines to be considered, before July and after July.

When we consider before July we see that the members of OPEC had decided to increase the amount of output, thus decreasing the price. Due to this decrease in price China started importing a lot. Purchases rose to an all-time high in May. This can be understood using a graph as shown below.

As we can see the supply of the product increased from S to S1 this decreased the price from P0 to P1. Now because of the decreased prices, China imported more

Now after July, Opec has decided to decrease production and increase the cost of goods. This can be be seen from the graph below-

Here the supply curve shifts and we can see that the price increases yto P2 and the quantity decreases to Q2

Hope this helps!