Saudi Arabia may well have shocked the oil market last Friday, when it led the announcement that Opec Plus will deepen and extend the ongoing oil production cut. The market had largely expected the previously agreed quotas to continue, especially after the attacks on Saudi oil facilities. The fact that Saudi Arabia managed to minimize the damage and pulled it back swifter than many had feared – seems to have paved way for the shock decision.

Saudi Arabia, being the Opec leader and the single largest contributor to the production cut, appears to have been caught in disbelief, as the oil market did not pay much heed to the attack on Saudi oil facilities. Some were expecting a long-term risk premium in the range of $3-5 being attached to oil prices on account of geopolitical situation, but that did not materialize, which seems to have triggered the need to go for deeper cuts.

But there is an extent to which this production cut, of which Russia is also a part, can keep the oil prices up. Firstly, smaller Opec members, have of late been found wanting on terms of compliance, and have been asking special waivers on various accounts. Secondly, Russia is facing increasing pressure from within to rethink its position in the cartel, and limit its role in the longer term.

Be that as it may, Saudi Arabia has made it quite clear that it will go all the way to ensure the fresh and extended production cut arrangement, even if it takes shouldering the greater part of the burden. Saudi Arabia’s new share in the arrangement would mean its production would remain well under 10 million barrels per day for quite some time.

The real question is the motive of the fresh deal. Is it aimed at taking oil prices to as high as $80/bbl, which some say is the breakeven for the Kingdom? Is it aimed at keeping prices from falling further? Is it just aimed to create a bullish scenario around the Aramco deal? The real motive would never be known, but the market balance suggests that this cut alone lacks impetus to drive prices significantly.

Given the demand scenario and US production growth, the Opec Plus deal, could at best, lead to stable prices. The Aramco factor is not too outlandish either. Whichever way it is, the equilibrium still appears a long way off.