Saudi Arabia volunteers to cut its oil output

The reduction, one million barrels daily–about a tenth of Saudi current production, and roughly 1% of world daily oil consumption–starts in July. The Saudis will reevaluate the decision monthly after that.

What I find most telling is that the oil price remained basically unchanged on the announcement, even though we’re coming out of the seasonally weakest part of the year for oil demand into one of the stronger. And because there are no easy substitutes for oil, even small supply/demand imbalances typically create strong price movement up or down.

The lack of price movement still makes sense if the Saudi move was (as I think it actually was) to prevent the oil price from declining. The more important question for us as investors is what the cause of downward pressure might be.

–one possibility is that the past winter in the eastern US and in the EU was warmer than usual, meaning there was less oil burned for heat–and therefore inventories are, for now at least, higher than normal

–another is that much more oil than the world thinks is making its way out of Russia, increasing supply. This might imply that Russia is pushing it wells harder than it should–and enough to shorten their useful lives by a lot–on the idea that the resulting long-term economic damage to the country won’t matter if it loses the war in Ukraine

–it may also be that world oil consumers are still conserving and/or that electric vehicles have already become important enough to make a permanent dent in gasoline demand.

The first of these is certainly true. I think the second is likely, both the extra oil part and the damage to Russian oilfields. The third is the hardest to know but would have the most important long-term implications.

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