Oil prices registered the biggest daily rise in nearly a year Monday after a surprise announcement by Saudi Arabia and other major oil producers to cut more production shook markets.
U.S. benchmark crude oil rose $4.24 to $79.91 per barrel, or 5.6%, in electronic trading on the New York Mercantile Exchange. It rose $1.30 to $75.67 per barrel on Friday, ahead of the weekend meeting where members of the so-called OPEC+ group of oil-exporting countries decided on the cuts, which are besides a reduction announced last October that infuriated the Biden administration.
Brent crude, the pricing basis for international oils, was trading at $84.22 a barrel by 0900 GMT, up $4.33, or 5.4%, after touching the highest in a month at $86.44 earlier in the session.
The OPEC+ shook markets by announcing further production cuts off about 1.16 million barrels per day (bpd) on Sunday. The cartel had been expected to maintain its earlier decision to cut output by 2 million bpd until December at its monthly meeting on Monday.
The pledges bring the total volume of cuts by OPEC+ to 3.66 million bpd, according to Reuters calculations, equal to 3.7% of global demand.
The cuts in oil output immediately pushed prices higher and were expected to boost gas prices, adding to strains in many countries where high fuel prices are a heavy burden. Higher oil prices also will complicate the efforts by central banks to rein in inflation.
“This will create both political waves across Europe and even higher general inflation in the USA, leading to renewed pressure on the Federal Reserve to keep hiking rates aggressively,” Clifford Bennett, chief economist at ACY Securities, said in a report.
As a result, Goldman Sachs lowered its end-2023 production forecast for OPEC+ by 1.1 million bpd and raised its Brent price forecasts to $95 and $100 a barrel for 2023 and 2024, respectively, it said in a note.
"I think the alliance wants to make sure that (oil) surpluses don't extend into the second half of 2023, as they know that most of the economic weakness is going to come then," said Samy Chaar, chief economist at Lombard Odier.
"It's simply indicative of the global economy slowing, which is not necessarily bad news as it's mainly a self-inflicted slowdown caused by the U.S. and Europe to make sure that inflation is brought closer to target."
The Biden administration said the move announced by the producers was unadvisable and some analysts questioned OPEC+'s rationale for the extra production cut.
"We don't think cuts are advisable at this moment given market uncertainty – and we've made that clear," a spokesperson for the National Security Council said.
Last October, OPEC+ had agreed to an output cut of 2 million bpd from November until the end of the year, a move that angered Washington as tighter supply boosts oil prices.
The U.S. has argued that the world needs lower prices to support economic growth and prevent Russian President Vladimir Putin from earning more revenue to fund the Ukraine war.
After Russia's unilateral reductions, U.S. officials said its alliance with other OPEC members was weakening, but Sunday's move shows the cooperation is still strong.
Russia said on Monday it was in constant contact with other OPEC+ countries and that it was "in the interests" of the world energy industry to support prices for oil and oil products.
"It is in the interests of global energy markets for world oil prices to remain at a good level," Kremlin spokesperson Dmitry Peskov told reporters.
"Whether other countries are happy with this or not is their business," Peskov noted.
"It's hard to buy the 'pre-emptive' and 'precautionary' reasoning – especially now when the banking crisis had tailed off and Brent had crawled back up toward $80 from its 15-month lows earlier in March," said Vandana Hari, founder of oil market analysis provider Vanda Insights.
The decision may mean OPEC+ still sees economic storm clouds on the horizon, Jorge Leon, senior vice president at consultancy Rystad Energy, said.
"These cuts may be signaling that OPEC+ believes that there are enough recessionary indicators in the market... (and) will further tighten the oil market for the rest of the year and could push prices above $100 per barrel."
Brent fell last month toward $70 a barrel, the lowest in 15 months, on concerns that a global banking crisis and rising interest rates would hit demand despite lower OPEC oil output in March because of a halt in some of Iraq's exports.
Analysts say the latest decision could deal a blow to markets, which had rallied in recent weeks on optimism that the recent banking sector turmoil could force the U.S. Federal Reserve (Fed) to end its rate hike drive sooner than expected.
"For equity investors, this could be a rude awakening, as markets imply a Goldilocks outlook of reduced discount rates but no recession," said Lazard Ltd's Ronald Temple.
"The OPEC+ production cut is another reminder that the inflation genie is not back in the bottle."
