Oil price stabilized: Iraq and Libya join in production cuts

 

Saudi oil production cuts

The rare unity of Arab nations with Saudi Arabia at its nucleus appears to be helping the latter in its determination to cut the crude oil output to compensate for the loss of revenues during the past few months.

Both Iraq and Libya confirmed that they will cut down the output for January and February, mimicking what Saudis did: not only did Saudi Arabia cut the oil output by 1 million barrels per day, but also raised the crude oil price for Asia, something that didn’t go down very well with the key players in the region.

For example, the Indian petroleum minister took a swipe at Saudi Arabia saying he didn’t understand the logic behind such a move; during the height of the pandemic, however, Saudis reduced the price of crude oil for the region, to help them out, when their respective economies were suffering.

Since India buys most of its oil from Iraq, the latest move by Iraq with the blessings of the Saudis, may not go down well with New Delhi, as the Indian economy has suffered the worst setback in 70 years; when the country relies on the oil imports for 80% of its domestic needs, the rising oil price at a critical time will have far-reaching consequences for the nation.

Both China and India, two major consumers of crude oil in the world, went on a buying spree at the height of the pandemic, when the price of the commodity was at the rock bottom; the only stumbling block against the ambitious move was the dearth of storage facilities.

In this context, the key decision makers in Saudi Arabia and the UAE must have thought that they helped the two nations in question in their hour of need and time has come for them to generate some revenue when the conditions are conducive for it.

The Saudis never shied away from revealing the motive behind the cut in output; the consumers know it too.

On the other hand, it is in the middle of a budget deficit crisis and in order to address it, the Kingdom needs cash. The kingdom cannot have the cake and eat it, though.

At the same time, Saudi Arabia knows its arch rival in the region, Iran, is waiting in the wings to flood the markets with oil in order to compensate for its lost revenue for four years, when President Trump was at the helm of the US administration.

Moreover, the US shale producers are still on Saudi radar, as the latter is fully aware of ingenuity of the former when it comes to cutting down on production costs.

That may be the reason that Saudis announced the output cut only for February as a ‘wait and see strategy’ until the new US administration dusts off and gets on with the business.

The post-Covid-19 world is evolving fast and could take unexpected turns this year, as volatility is growing on many fronts. Saudis cannot turn a blind eye to it or ignore the reality, while stubbornly sticking to its positions indefinitely – as they used to do in the past.

 

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