OPEC+ announced a surprise oil production cut of more than 1 million barrels a day, abandoning previous assurances that it would hold supply steady and posing a new risk for the global economy, Report informs via Bloomberg.
It’s a significant reduction for a market where — despite the recent price fluctuations — supply was looking tight for the latter part of the year. Oil futures soared as much as 8% in New York on Monday while gasoline also gained, adding to inflationary pressures that may force central banks around the world to keep interest rates higher for longer.
Saudi Arabia led the cartel by pledging its own 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 the 2023.
“OPEC+ clearly want a higher price,” said Gary Ross, a veteran oil consultant turned hedge fund manager at Black Gold Investors LLC. The group “is following through on being proactive and ahead of the curve, and is trying to rip oil prices from the grip of” macro sentiment.
The international Brent benchmark traded near $84 a barrel at 1:30 p.m. in Singapore, while US gasoline jumped as much as 4.5%. Any increase in the cost of transportation fuels tends to be closely monitored by American politicians, particularly ahead of the summer season when more people take road trips and vacations.
Top oil analysts issued calls for $100 crude after the decision, with some expecting worldwide supply-demand balances to be in deficit earlier than expected. That view was reflected in the strengthening of Brent’s backwardation — where the premium of prompt shipments rises relative to later supplies in a closely watched signal of tightness.
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.
The initial impact of the cuts, starting next month, will add up to about 1.1 million barrels a day. From July, due to the extension of Russia’s existing supply reduction, there will be about 1.6 million barrels a day less crude on the market than previously expected. Russia initially moved to lower production in March, in retaliation against western sanctions prompted by its invasion of Ukraine.
Riyadh said on Sunday the reductions were a “precautionary measure aimed at supporting the stability of the oil market.”
Relations between Saudi Arabia and the US have been fraught since last year, when the White House’s efforts to cajole the kingdom into pumping more oil fell flat.