Oil prices jumped by more than 6 per cent on Monday, headed for its biggest daily rise in nearly a year after OPEC+ jolted markets with plans to cut more production.
Brent crude was up $4.91, or 6.2 per cent, at $84.80 a barrel touching its highest since March 7 at $86.44. West Texas Intermediate crude U.S. was up $4.83, or 6.4 per cent, at $80.50 a barrel, after hitting its highest since late January.
The Organization of the Petroleum Exporting Countries and allies including Russia, a group collectively known as OPEC+, shook markets with Sunday’s announcement that it is cutting its production target by a further 1.16 million barrels per day (bpd).
The group had been expected at its monthly meeting on Monday to stick with its previous decision to target output cuts of 2 million bpd until December.
The latest pledges bring the total volume of cuts by OPEC+ to 3.66 million bpd representing 3.7 per cent of global demand.
“The Sunday production cut was on no one’s radar… With U.S. oil producers focused on capital discipline, OPEC+ remains in control of the oil market,” UBS analyst Giovanni Staunovo said.
U.S. President Joe Biden’s administration said it was given a “heads up” on the move and told Saudi officials that it disagreed with it.
Meanwhile, some analysts pointed to a weakening economy and rising stockpiles as a rationale for the cuts.
U.S. manufacturing activity slumped to the lowest level in nearly three years in March as new orders plunged. Activity could decline further as interest rate hikes have pushed borrowing costs higher, cooling demand for goods.
J.P. Morgan analysts said they view the OPEC+ cuts as a preemptive measure to whittle down the market surplus into the second half of 2023, while Barclays now sees a $5 upside to its $92 per barrel forecast for Brent this year.
Goldman Sachs lowered its end-2023 production forecast for OPEC+ by 1.1 million bpd and raised its Brent price forecasts to $95 a barrel for 2023 and $100 for 2024, it said in a note.
“Until last week, we had U.S. crude storage at multi year highs … There are plenty of cargoes, mostly Russian, floating around in the seven seas looking for a home,” Mizuho analyst Robert Yawger said.
Brent fell last month toward $70 a barrel, its lowest in 15 months, on concerns that a global banking crisis and rising interest rates would hit demand despite lower OPEC oil output in March after a halt in some of Iraq’s exports.
While the OPEC+ cuts may lift oil prices in the near term, they also raise the possibility of more rate hikes from central banks fighting inflation. Refiners also may lower activity to counter high crude oil input costs, he said.
The RBOB gasoline futures contract rose almost 8% during Monday’s session to its highest since January. It was last trading at $2.76 a gallon, up about 3.1 per cent.
