Crude Rises on Rumour of Deeper OPEC Cuts - Although More Shale Output May Result

The Saudis are said to be trying to boost the value of the Aramco IPO: File Image/PixaBay

Inspired by little more than a hopeful remark from an anonymous source, oil prices on Monday shot up about 1 percent, on the prospect of the Organization of the Petroleum Exporting Countries (OPEC) agreeing to deepen as well as extend its production cuts during a meeting this week.

The OPEC source told media that "There is a discussion about a deeper cut taking place" and cited forecasts for "a big stock build in the first half of the year - we need to keep an eye on that."

Even though the source went on to say that "A deeper cut could boost prices, which would bring on more shale output and not help," crude traders on Monday responded decisively: Brent rose 43 cents, or 0.7 percent, to $60.92 per barrel, while West Texas Intermediate gained 79 cents, or 1.4 percent, to $55.96.

The prevailing argument is that Saudi Arabia wants to deeper cuts in order to boost the value of its long-awaited IPO of Saudi Aramco: according to Reuters, one source told the news agency that "They [the Saudis] want to surprise the market," while another two sources said the latest OPEC analysis showed a large oversupply and build up in inventories in the first half of 2020, if no additional cuts were made.

For the record, OPEC ally Russia opposes deeper cuts or a longer extension, but pundits point out that Moscow has often taken a tough stance before every meeting (this latest one scheduled for Thursday) before approving policy.

For his part, Gary Ross, founder of BlackGold Investors, said it would make sense for Riyadh to support further cuts because of the Aramco IPO; of the OPEC meeting itself, Norbert Rucker, head of commodity research at Julius Baer, said "the most likely outcome is an extension of the supply deal for another six months, wrapped in flowery communication leaving the room open for further loose compliance and policy adjustments should market conditions change."

Meanwhile, capping Monday's gains was news of a surprise decline in U.S. construction spending and a fourth straight monthly contraction in American manufacturing activity; also causing trader concern was a report that U.S. president Donald Trump is ready to hit China with stiffer tariffs if efforts toward a trade truce between the two countries falter.