The sudden declaration by OPEC+ to further reduce output in what top producer Saudi Arabia called a precautionary measure to protect market stability sent oil prices soaring on Monday.
Brent crude reached its highest price in a month at $86.44 earlier in the day. By 03:47 GMT, it was trading at $84.26 a barrel, up $4.37 or 5.5%. US West Texas Intermediate crude hit its highest level since late January earlier today and was trading at $79.90 per barrel, up $4.23 or 5.6%.
By announcing production cutbacks of around 1.16 million barrels per day on Sunday, the Organisation of the Petroleum Exporting Countries (OEPC) and their allies, notably Russia, shocked the markets. At its monthly meeting on Monday, the group known as OPEC+ was anticipated to uphold its earlier choice to reduce oil production by 2 million bpd until December.
According to calculations by Reuters, the pledges raise the overall oil output cuts by OPEC+ to 3.66 million bpd, or 3.7% of global demand. As a result, Goldman Sachs increased its Brent price projections for 2023 and 2024 to $95 and $100 a barrel, respectively, and decreased its OPEC+ production forecast for end-2023 by 1.1 million bpd.
According to Goldman, the output decrease may raise oil prices by 7%, increasing Saudi Arabia’s and OPEC+’s oil revenues. The OPEC oil cuts, according to the Biden administration, were a bad idea. The justification for OPEC+’s further production cut was contested by certain analysts.
Since the banking crisis has subsided and Brent has slowly climbed back up near $80 from its 15-month lows earlier in March, Vandana Hari, founder of oil market monitoring company Vanda Insights, said it is difficult to understand the “pre-emptive” and “precautionary” reasoning.
Despite lower OPEC oil supply in March owing to oilfield maintenance in Angola and a stop in some of Iraq’s exports, Brent slid last month towards $70 a barrel, the lowest in 15 months, on worries that a worldwide banking crisis and increasing interest rates would hurt demand.
According to RBC Capital analyst Helima Croft, “Today’s move, like the October cut, can be viewed as another unambiguous signal that Saudi Arabia and its OPEC partners would strive to short circuit further macro sell-offs and that Jay [Jerome] Powell is not the only central banker that matters.”
The underlying fact is that the major policy efforts of Washington and Riyadh simply have different pricing targets.
The decision was made later than anticipated, according to JP Morgan analysts, and the tardy response to lower prices would have a minimal effect on overall balances and could prolong the price impact. They stated that “since November, our global oil supply-demand balance revealed that a substantial governmental response was needed to keep global oil surpluses in check.”
Meanwhile, US crude production rose in January to 12.46 million barrels per day (bpd), the highest since March 2020, Energy Information Administration (EIA) data showed on Friday.