Oil prices have surged this morning, posting the biggest daily rise in nearly a year, after a surprise announcement by OPEC+ to cut more production jolted markets.
The move by Saudi Arabia and other Middle East producers has caught the energy industry flat-footed and will lift global prices, industry executives said on Sunday.
The cartel had been largely expected to stick to its already agreed upon 2 million barrel per day (bpd) cuts when its joint ministerial panel, which includes Saudi Arabia and Russia, meets on Monday.
The OPEC move and Russia’s extension through year-end of cuts was a coordinated effort that signalled the OPEC+ remains in charge of global markets.
‘Spanner’ in the works
Benjamin Picton, senior macro strategist with Rabobank in Sydney said the move was bad news for economies hit by spiralling inflation.
He said: “The announcement, strangely, came ahead of the actual OPEC meeting scheduled… and throws another spanner in the works for central bankers who may have just started to unclench their jaws a little with regards to the inflation situation.
“The durability of declining headline inflation must now be seriously questioned if oil producing countries are determined to ensure that oil prices have already bottomed.”
The supply cut would drive up crude prices just as weakening economies depress fuel demand and prices.
The OPEC+ production cuts come as purchases by China, the world’s top crude importer, are expected to hit a record in 2023 as it recovers from the Covid-19 pandemic, while consumption from No.3 importer India remains robust, traders told the Reuters news agency.
Saudi Arabia led the cartel by pledging a 500,000 barrel-a-day supply reduction.
Fellow members including Kuwait, the United Arab Emirates and Algeria followed suit, while Russia said the production cut it was implementing from March to June would continue until the end of 2023.
The Brent benchmark traded near $84 a barrel at 1:30 pm in Singapore, while US gasoline jumped as much as 4.5%, causing concern for policy makers ahead of the summer season when Americans take road trips and holidays.
Bloomberg warned the surprise move could once again flare tensions between the US and Saudi Arabia, a regional partner whose relationship with President Joe Biden’s administration has been tense. The White House said that the new cuts were ill-advised.
Riyadh said on Sunday the reductions were a “precautionary measure aimed at supporting the stability of the oil market.”
On Sunday, the White House said the OPEC+ decision wasn’t advisable under current market conditions. The Biden administration also said the US will work with producers and consumers with a focus on gasoline prices for Americans.
Economic Interest
As recently as Friday, delegates had been indicating privately that there was no intention to change their production limits.
Oil fell to a 15-month low last month due to the turmoil caused by the banking crisis, but prices had recovered as the situation showed signs of stabilizing.
Brent crude closed just below $80 a barrel on Friday, up 14% from its March trough.
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