Saudi Arabia, the world’s largest oil exporter, has announced additional voluntary cuts of 1 million barrels per day for February and March, in a bid to stabilise an oil market that has been battered by the coronavirus-driven economic downturn.

Saudi Energy Minister Abdulaziz bin Salman on Tuesday surprised the market with the country's pre-emptive output-cut pledge, which Russian Deputy Prime Minister Alexander Novak described as "a New Year's gift" to the oil market.

Saudi Arabia will hold its production level during February and March at 8.119 million barrels per day, much lower than its allocation of 9.119 million bpd, the Saudi energy minister said after two days of intense talks by the Opec+ group.

Oil prices jump higher

Saudi Arabia’s unilateral output-cut plans lifted oil prices to their highest levels in almost a year.

The Brent price rose almost 6% this week to more than $54 per barrel on Wednesday, on hopes that lower-than-expected crude supplies during the quarter and a global economic recovery could provide strong support for oil prices moving forward.

The Opec+ group, which controls almost half of the world's crude production, agreed to continue cutting oil production almost to the January levels, with cuts of 7.125 million bpd in February and 7.05 million bpd in March.

The additional cuts proposed by Saudi Arabia would widen the overall Opec+ output cuts to 8.125 million bpd in February before they narrow to 8.05 million in March, based on Opec figures and the Saudi minister's comments.

Russia, Kazakhstan to boost output

While most of the Opec countries would maintain similar production levels during the next two months, Russia and Kazakhstan got away with marginally increasing their output.

The two countries, which had sought an almost 500,000 bpd Opec+ production increase during February, will be allowed to boost their output by 75,000 bpd in February and a further 75,000 bpd in March.

While Russia and Kazakhstan have been allocated marginally higher production levels, the decision is likely to irk Opec producers like the United Arab Emirates, which has been demanding an increase in its production quota.

“Today’s deal, however, even though it offers some market stability until the end of March, is not a deal that Opec members may digest easily," Rystad Energy’s Bjornar Tonhaugen said in a note this week.

"Many oil producers whose fiscal budgets depend on oil output are keeping their taps tight, while sub-complying alliance member Russia is allowed to enjoy a boost.”

Amdist more Covid-19 lockdowns in Europe, analysts believe Saudi Arabia’s pre-emptive cuts also suggest that the kingdom foresees relatively lower oil demand in the short term, which warranted drastic steps by the key Opec swing producer.

“A separate and key takeaway from the Saudi stance today is that the kingdom cannot have offered to cut output without weighing demand carefully,” Tonhaugen said.

Rystad Energy believes that “the Saudis are seeing demand really threatened in the short-term and want to protect prices as much as they can, especially at a time when tensions are flaring again in the region, which creates some unpredictability over price levels".