Saudi Prepared to Reduce Oil Output Even More Than Pledged as Market Eyes $70 Oil

Khalid Al-Falih, energy minister for Saudi Arabia

Saudi energy minister Khalid Al-Falih Saturday said his country was prepared to make a greater than expected reduction in its oil production, following the agreement by eleven non-OPEC producers to make a collective 558,000 barrels per day (bpd) in production cuts, which comes in addition to the 1.2 million bpd pledged by OPEC last month.

"I can tell you with absolute certainty that effective Jan 1 we're going to cut and cut substantially to be below the level that we have committed to on Nov 30," said Al-Falih.

Depending on market conditions, that could see the nation's production fall below the psychologically significant 10 million bpd mark, he added.

Analysts widely interpreted the comments as a sign of commitment from Riyadh that it is serious about rebalancing the oil market, and raising oil prices.

"This is shock and awe by Saudi Arabia," said Energy Aspects analyst Amrita Sen.

Just two weeks ago analysts were predicting oil prices could plummet if producers failed to reach agreement over curbing their output, but Medley Global Advisors consultant Yasser Elguindi says that "No-one is talking any more about $30 a barrel oil."

Instead, an increasing number of market participants are joining Pierre Andurand, chief investment officer and founder of Andurand Capital Management LP, in expecting oil to rise to $70/bbl, which in turn could push IFO380 bunker prices in the primary ports as high as $400/mt, Ship & Bunker data suggests.

Francisco Blanch, head of commodity markets research at Bank of America Merrill Lynch, forecasts $70 by mid-2017, while local media quoted Mehdi Asali, former Iranian director general for OPEC affairs at the Ministry of Petroleum, as saying that "we can expect $60 or even $70 oil in 2017" if producers make the expected cuts.

While some question the longevity of the deal, saying producers may fail to stick to their intended quotas or high oil prices will let US shale producers ramp up production, others say those are non-issues for now.

"Shale producers may increase activity, but it will take at least 12 months for those barrels to come into the market. Meanwhile, OPEC barrels will exit global markets on Jan 1," says Blanch.

As for the issue of non-compliance, Pira Energy founder Gary Ross says "compliance tends to be good in the early stages," but also warned that "as prices continue to rise, compliance will erode."

In early Monday trading, the weekend's developments had already helped to lift crude benchmarks over 4 percent.