Oil Extends Gains in Asia After Surging on Saudi Output Cut

(Bloomberg) -- Oil edged higher in Asia after surging to a 10-month high on a surprise Saudi Arabian pledge to cut an extra 1 million barrels a day of crude output in February and March.

Futures in New York were steady near $50 a barrel after jumping 4.9% on Tuesday. OPEC+ reached an agreement following two days of talks to curb supply over the next two months. The move by Saudi Arabia, the group’s de-facto leader, paved the way for other producers to keep supplies unchanged and for Russia and Kazakhstan to lift output by a combined 75,000 barrels a day in both February and March.

The kingdom’s pledge, which Russia’s deputy prime minister called a “new year gift” to the oil market, comes amid more stay-at-home orders and travel restrictions to rein in a surge of infections. Germany extended its lockdown, while Dalian in China asked people considered more vulnerable to Covid-19 to leave the city due to an outbreak there.

OPEC+ faces a complex demand outlook as it decides how to move forward with its output plan month by month. There are indications that parts of the global economy are staging a comeback, with a gauge of U.S. manufacturing expanding last month at the fastest pace since 2018. But other areas that seemed to be recovering are wavering, with Goldman Sachs Group Inc. saying the Saudi move likely reflects expectations for demand to weaken further.

“The 1 million barrel per day reduction is nothing to scoff at and it will tip the market back into a supply deficit for the first quarter at least, even if demand is set to dip slightly on the new virus strain,” said Howie Lee, an economist at Oversea-Chinese Banking Corp. “The message is now loud and clear that Saudi Arabia is there to guard the fragile equilibrium in this market.”

The Saudi decision and the rally in prices may give the U.S. shale industry some room to begin snapping up market share, though financial hardships from the pandemic and investor expectations remain obstacles. It’s an especially sweet gift for U.S. shale drillers, said Helima Croft, chief commodities strategist at RBC Capital Markets. Shale stocks subsequently surged.

See also: Saudi Arabia’s Double-Edged Gift for U.S. Shale: Liam Denning

The American Petroleum Institute reported that U.S. crude inventories fell by 1.66 million barrels last week, according to people familiar with the data, which would be the fourth straight weekly drop if confirmed by official figures due Wednesday. The API reported sharp jumps in gasoline and distillates stockpiles, however, a sign the virus is damping demand for fuel.

The oil futures curve reacted to the Saudi move. Brent’s prompt timespread was 11 cents in backwardation -- where near-dated prices are more expensive than later-dated ones -- compared with a 7-cent contango on Monday. That’s a bullish signal that the market is comfortable with the supply-demand outlook.

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