Oil surges 8% after OPEC+ blindsides market with production cut

Crude Oil

When OPEC+ abruptly announced crude output cutbacks that threaten to tighten the market, delivering a further inflationary shock to the global economy and irking the White House, oil jumped at the start of the week.
At 7:27 a.m., West Texas Intermediate had increased by as much as 8%, the largest intraday movement in almost a year. London saw a rise in the dollar while other markets saw an increase in Treasury yields.
On Sunday, the Organization of Petroleum Exporting Countries and allies, including Russia, agreed to implement cuts starting in January that will total more than 1 million barrels per day, with Saudi Arabia taking the lead with 500,000 barrels. Markets anticipated that OPEC+ would maintain constant output. The shocking action was taken outside of the group’s predetermined window for examining the market and its members’ supplies.
The decision’s effects were immediately felt on the entire world oil market. Indicating predictions of tighter supply, Goldman Sachs Group Inc. raised its price forecasts for this year and the following year. Moreover, hundreds of thousands of futures were traded during a typically quiet Asian trading session. The rise in US petrol futures highlights the risks of inflation.

According to Daniel Hynes, senior commodity analyst at Australia & New Zealand Banking Group Ltd., “this measure does provide a pretty strong signal to the market that they’re going to support prices,” adding that the likelihood of oil hitting $100 once more “definitely has improved.”
The US would collaborate with producers and consumers with a focus on lowering petrol costs, the White House said, adding that the OPEC+ decision was ill-advised. Following Russia’s invasion of Ukraine in 2014, President Joseph Biden issued an unprecedented release of the nation’s strategic crude reserves.

Prior to the unexpected intervention, crude prices had their worst first-quarter decline since 2020 due to the turbulence in the banking sector and the potential for a US recession. Yet, a lot of industry observers have stated they anticipate a recovery in the second half, supported by increased demand in China once Covid Zero halted.

Costlier oil prices pose a threat of igniting still-high inflation, making it more difficult for central banks, particularly the Federal Reserve, to control enduring price pressures. The Federal Reserve boosted interest rates once more last month, and the next monetary policy meeting is slated for May.

The market’s joy at the semi-autonomous Kurdish region of Iraq’s agreement with the federal government to resume oil shipments through Turkey this week was overshadowed by news of the cuts. The supply disruption last week had supported a gain of more than 9% in WTI.

According to Vandana Hari, the founder of Vanda Insights in Singapore, the OPEC+ “action has the potential to send the market into a deficit in the second quarter, unlike earlier estimates of a surplus.” Yet, she continued, increased prices could reduce demand in some cases and exacerbate the persistent inflation that central banks are attempting to stop, increasing the likelihood of a recession.