Oil: The first cut is not always the deepest - ANZ

Philip Borkin, Senior Economist at ANZ, notes that in a surprise move, Saudi Arabia announced its intention to cut oil production even more than what was agreed with its OPEC counterparts last month.

Key Quotes

“Following hot on the heels of an announcement by a number of non-OPEC countries over the weekend (11 in total, including Russia and Mexico) to cut production by 558k barrels per day, the Saudi oil minister stated that “I can tell you with absolute certainty that effective January 1 we’re going to cut and cut substantially to be below the level we have committed to on November 30.” Clearly all eyes will be on how oil prices take this latest news, but one would have to think it will be price supportive, which could therefore have wider implications for the likes of the broader commodity picture, commodity currencies, energy stocks and market-based measures of inflation expectations to start off the week.”

“But how significant a rally are we talking? Well the fact that 1) the oil market still has a large inventory overhang to work through; 2) shale oil producers continue to wait in the wings for any decent price bounce; and 3) history has taught us to be a little skeptical given non-compliance to such agreements, it is hard to see oil prices surging meaningfully higher just yet.”