Oil prices rose on Monday, rocked by OPEC+’s surprise announcement to further cut production, which it calls a precautionary measure to support market stability.
Brent crude is up $4.37, or 5.5%, at 0347 GMT to $84.26 after touching the highest in a month at $86.44 earlier in the session.
West Texas Intermediate crude (WTI) was up $4.23, or 5.6%, to $79.90 a barrel after hitting its highest level since late January.
The Organization of the Petroleum Exporting Countries and its allies, including Russia, shook the markets by announcing production cuts of around 1.16 million barrels per day on Sunday.
The group, known as OPEC+, was expected to maintain its previous decision to cut production by 2 million barrels per day through December at its monthly meeting on Monday.
According to calculations, the commitments bring OPEC+’s total cut volume to 3.66 million barrels per day or 3.7% of global demand.
According to some analysts, the end of 2023 production forecast for OPEC+ has dropped by 1.1 million barrels per day and Brent price forecasts have increased to $95 and $100 for 2023 and 2024, respectively. It is estimated that the decline in production could lead to a 7% increase in oil prices and contribute to the increase in Saudi and OPEC+ oil revenues.
The rationale for the extra production cut by OPEC+ is being questioned. The Biden administration said it found the move unwise.
The ‘pre-emtive’ and ‘precautionary’ logic is hard to buy as the banking crisis slows and Brent climbs to $80 from a 15-month low in early March.
Last month, Brent fell to a 15-month low of $70 a barrel on oilfield maintenance in Angola and fears that the stagnation in parts of Iraq, the banking crisis, and rising interest rates will hit demand.
Like the October cut, this move could be read as a sign that Saudi Arabia and OPEC partners will try to short-circuit more macro selling and that the FED is not the only quarterback. As a result, Washington and Riyadh have different price targets for key policy initiatives.
According to some, the move came later than expected and the slow response to weak prices will have a limited impact on the overall balances and may delay the price impact. The global oil supply-demand balance since November shows that strong policy action is needed to contain global oil surpluses.
Meanwhile, U.S. crude production hit 12.46 million barrels per day in January, the highest since March 2020, according to data from the U.S. Energy Information Administration (EIA) on Friday.
