Oil Prices Recover as Saudi Arabia Takes Drastic Measures to Rebalance Market

Oil prices rebounded Tuesday after Saudi Arabia announced a new round of production cuts that were far larger than initially reported. The move comes amid growing doubts that the kingdom will be able to balance its budget this year.

Crude Rallies

The West Texas Intermediate (WTI) benchmark for U.S. crude futures topped $54.00 a barrel for the first time in six days. The contract was last seen trading at $53.42 a barrel, having gained $1.02, or 2%. International benchmark Brent crude futures advanced $1.18, or 1.9%, to $62.69 a barrel in London.

Crude prices declined sharply at the start of the week and have been directionless for the past month as traders assessed the impact of slowing global growth on energy demand. A lack of progress on the trade front between the United States and China has also added to the pressure. A new deal that keeps goods and services flowing is considered essential for the Chinese economy, which is a major consumer of energy.

Saudi Arabia Announces Deeper Output Cuts

Saudi Arabia announced Tuesday that It will reduce oil production to nearly 9.8 million barrels per day beginning in March, well below the production quota agreed to in December. Against current levels, that represents a drop of over half a million barrels per day.

The Organization of the Petroleum Exporting Countries (OPEC), an oil cartel made up mainly of Arab states, removed 797,000 barrels per day from the market last month, according to its latest report. The group had initially vowed to reduce output by 812,000 barrels per day during the month.

Saudi Arabia, the group’s de facto leader, is under growing pressure to boost prices after announcing a lofty budget for 2019. The blueprint seeks to boost spending by 7% in order to kick start a sluggish economy. According to the International Monetary Fund, oil must return above $80 a barrel for the kingdom to balance its budget.

Crude Oil: A New World Order Emerges

Brent futures peaked north of $86 a barrel in early October before reversing more than 42% over the next three months. A sluggish global economy and rising U.S. output have pressured the market and made it more difficult for OPEC to achieve its target.

Featured image courtesy of Shutterstock. Chart via Barchart.com.

Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi