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With the decline in oil demand due to the Covid-19 crisis, Saudi Arabia has pledged to further cut its production rate. Oil prices surged as a result of this news.
Saudi Arabia, a kingpin in oil production, announced it will further reduce its oil production to counter the fall in global demand, caused by the ongoing coronavirus pandemic. As a result, crude oil benchmark, Brent Crude futures, is up almost 2% to trade at around $30.22 at the time of writing.
The WTI crude oil, on the other hand, is up approximately 4.52% to trade slightly above $25.23. The Middle-East oil kingpin said overnight it would cut production by a further 1 million barrels per day in June. As a result, it will have reduced its total production to 7.5 million BPD, approximately 40% down from April.
This follows a 25% fall in net income for the first quarter, which the state oil company Aramco reported on Tuesday. In the first three months, the net income stood at 62.5 billion riyals down from 83.3 billion riyals over the same period last year. The company reported that its free cash flow in the first quarter was 56.3 billion riyals, which is down from 65.1 billion riyals over the same period in 2019.
“The Covid-19 crisis is unlike anything the world has experienced in recent history and we are adapting to a highly complex and rapidly changing business environment,” said Amin Nasser, Saudi Aramco President and CEO. “Aramco has demonstrated resilience during economic cycles and has an unparalleled position due to a strong balance sheet and low-cost structure.” He concluded.
Oil Industry and Saudi Arabia amid Coronavirus
The United Arab Emirates and Kuwait also joined Saudi Arabia in announcing a further production cut, to help stabilize the oil industry. Both will account for 180,000 BPD in total.
Stephen Innes, Chief global market strategist at AxiCorp, explained:
“This reduction in production provided excellent optics encouraging other OPEC+ members to comply and even offer additional voluntary cuts, which should quicken the global oil markets’ rebalancing act.”
“It was so sudden and so significant, it was just seen as: ‘Is this a proactive policy or just a reaction to weak demand?’” said Vivek Dhar, Commonwealth Bank’s mining and energy economist.
The oil industry is facing an unprecedented crisis as the new wave of coronavirus starts emerging from states like China and South Korea, which had previously shown signs of winning the battle. the low demand for oil products is likely to go on for w while before people feel safe to go out and spend without fearing contracting the virus.