"Take all necessary measures"! What does Saudi Arabia's 1 million barrel cut mean?

Saudi Arabia announced production cuts as scheduled, aiming to stabilize oil prices, but the analysis pointed out that the market is still weak, and short-term oil prices depend on "a test of the will of Saudi Arabia and bears."

Goldman Sachs believes that this production cut shows that Saudi Arabia has shown determination to continue to fight the bears. But with market sentiment still weak, this meeting could simply mean "moderately bullish". The value of Saudi Arabia's additional cuts depends on the duration of the cuts.

Saudi Arabia's production cuts were the country's most in years, bringing its output to 9 million b/d, the lowest level since June 2021.

As the only OPEC country capable of freely increasing and reducing production, Saudi Arabia said it would "take all necessary actions" for the stability of the crude oil market.

Stimulated by the supply side, WTI and Brent crude oil opened higher on Monday.

Market sentiment is weak

Goldman Sachs believes that this OPEC+ meeting means "moderate bullish", although production cuts will stimulate oil prices higher, but Goldman Sachs stressed that the current market sentiment is still very weak, and positions are also biased towards bears:

It is important to consider these decisions in the context of market sentiment and positions, which remain very weak and short.

Although from a fundamental point of view, Saudi Arabia's additional production cuts are worth +$1-6/barrel, depending on whether the cuts last 1-6 months, and the strength of the physical market (borrowing the east wind of recession) should eventually boost positions and prices.

The squeeze on the commodity side comes first, followed by energy stocks that may also be affected.

The latest data from Goldman Sachs shows that energy stocks originally had the lowest net risk in the air of hedge funds, but this has changed:

Prices fell this week as hedge funds accelerated the sell-off in U.S. energy stocks. Nominee net selling of U.S. energy stocks this week was the biggest in ten weeks.

Saudi Arabia "firmly confronted"

Saudi Energy Minister Abdulaziz bin Sall said in a speech after the meeting that he would "take whatever is necessary" to stabilize the market.

Goldman Sachs said that this shows that Saudi Arabia, the leader of OPEC, has shown an unprecedented determination to continue to fight the bears.

Saudi Arabia implemented its first production cut in 3 months with inventories low to this day, and the declaration by the Saudi energy minister to "take all necessary measures" shows that the group is committed to continuing to fight the bears and preemptively use its unusually high pricing power.

Overall, today's dovish bullish meeting partially offset some of the bearish downside risk to our December 2023 price forecast of $95/b.

Bob McNally, president of consulting firm Rapidan Energy Group and a former White House official, said it would be a war between "Saudi Arabia seeking stability and bearish traders."

In the short term, crude oil prices will largely depend on a test of the will of both sides.

According to the International Monetary Fund, Saudi Arabia needs oil prices above $80 a barrel to balance its budget and fund some of the "gigabit projects" that the crown prince hopes will transform its economy.

The Wall Street Journal believes that the focus on financial markets highlights the pressure on the first Saudi prince to head the oil ministry:

As his half-brother, Crown Prince Mohammed bin Salman, pursues ambitious plans to reshape Saudi Arabia's oil-dependent economy, Abdulaziz must keep crude prices at an economically viable level.