Oil Slides As Economic Worries Eclipse Saudi Output Cut — Why $80/Bbl Price Is Crucial For The Kingdom

Concerns over the global economy dragged oil prices on Tuesday afternoon Asian trade after a knee-jerk surge the day before in the aftermath of the unexpected production cut announced by Saudi Arabia.

West Texas Intermediate futures maturing in July were trading 2.04% lower at $70.70 per barrel. Brent futures maturing in August were trading 1.67% lower at $75.42 per barrel.

The fall in oil prices comes at a time when investors and traders are keenly awaiting the Federal Reserve's interest rate decision during its June policy meeting scheduled next week which will also give hints about its future policy path. The central bank's policy decisions will have a huge bearing on the demand outlook of the world's largest oil consumer U.S.

Also Read: How To Invest In Oil

The United States Brent Oil Fund BNO closed 0.078% higher on Monday while the Vanguard Energy Index Fund ETF VDE lost 0.71%, according to Benzinga Pro.

CMC Markets analyst Leon Li told Reuters that oil prices are still in a bear market. "…we can see that some advanced economies have already started to fall into recession such as Germany,” Li said.

Saudi Budget: The fall in oil prices is definitely not conducive for Saudi Arabia, a key member of OPEC+. According to an IMF report released in May, the kingdom won't balance its budget if oil is below $80 a barrel, reported Bloomberg. The fund's latest estimates put this year's breakeven oil price for the kingdom at $80.9, the report said.

It, therefore, does not come as a surprise that the Middle Eastern nation recently announced it will cut production by an extra one million barrels per day in July.

The unexpected move by Saudi Arabia comes at the cost of ceding ground to two of its key allies including Russia, which made no commitment to trim output further, and the United Arab Emirates, which got a higher production quota for 2024.

Notably, Saudi Energy Minister Prince Abdulaziz bin Salman had stated he “will do whatever is necessary to bring stability to this market.”

Read Next: Jamie Dimon Reportedly Set To Meet New Democrat Coalition On Tuesday — Banking, US Economy On Agenda