Oil Market Bulls Feast On Free Lunch Served Up By Saudi Arabia

Oil Market Bulls Feast On Free Lunch Served Up By Saudi Arabia

Saudi Arabia's decision Tuesday to cut an additional 1 million barrels a day of production in February and March has two important consequences for oil markets. 

First, it means the recent bull run in oil prices has more upside than originally thought, as evidenced by the $2.50 a barrel surge in benchmark Brent to nearly $54 immediately following the news. U.S. oil prices meanwhile hit $50 for the first time since February.

Second, it shows that Saudi Arabia is stuck making deep supply cuts for the foreseeable future and must shoulder more of the burden of balancing the market in order to keep the fragile OPEC-plus alliance together. 

Both are good news for U.S. oil companies, which were already increasing drilling and fracking activity and pushing domestic output higher.

There's no such thing as a free lunch, but this surprise move by the Saudis is about as close as you're going to get.

With Russia pushing to add another 500,000 barrels a day of OPEC-plus production in February and Saudi Arabia seeking to maintain January's quotas due to concerns about demand losses from new Covid-19 lockdowns, the two leaders of the group found themselves at odds once again.

Saudi-Russian differences over OPEC-plus policy famously resulted in the disastrous price war in March