Saudi Arabia has decided to cut output by 800,000 barrels per day (bpd) to 8.292 million bpd in March from February, said Saudi Oil Minister Ali al-Naimi on Sunday. As fears that high prices would affect demand, U.S. Brent crude went below $123/barrel on Monday. OPEC may be indicating non-action over price reigning.
On the concern that demand may be weakening due to a high price pressure, oil prices fell early last week. It recovered on Friday after seeing positive U.S. economic data. Earlier this month, prices recoiled from a 32-month high of $127.02. ICE Brent crude hit $122.99/barrel (49 cents down) by 0641 GMT. U.S. crude was at $108.92/barrel (74 cents down). Brent may hit $120/barrel once more while U.S. oil may slip back to $108/barrel, said analyst Wang Tao.
Naimi’s oversupply and soaring crude prices worried being out of OPEC hands were seconded by Kuwaiti and UAE oil ministers. OPEC, as reflected by Naimi’s concerns, sees no coordinated supply policy change needed. This, despite Libyan unrest cutting output and expectations that Japanese demand will rise in its rebuilding efforts after the earthquake. Market analyst Ben Le Brun said the Saudis believe that there is a massive premium because of tensions in the Middle East and that demand is waning at these prices. The premium is believed to be around $15-$20 a barrel.
Libyan war escalated during the weekend with the firing of rockets aimed at rebels near Ajdabiyah borders. Some residents escaped to the eastern town. The oil market looks for an alternative closest to high-grade sweet Libyan oil, said OPEC Secretary General Abdullah Al-Badri on Monday. Refiners are wary about a replacement bend offered by Saudi Arabia to augment supply. Analyst Michael Lo said the Saudis have spare capacity but there is a quality mismatch between what refiners want and what the Saudis can provide.
On Sunday, China increased the required bank reserve, the 4th time already as an inflation control measure. The prices of oil were hushed on a wider expectation of monetary policy tightening in China, said analysts. Chinese and Hong Kong stock markets calmly accepted the news and traded higher as the day progressed after opening down.
Increased reserve rate after the April 5 increase of benchmark interest rates was China’s 7th from October. It underscored their determination to maintain an even economic level. The market will closely observe main U.S. corporate earnings during this holiday-shortened week. They will see how high oil and commodity prices affect the world’s biggest energy consumer.