Oil storage tanks stand at the RN-Tuapsinsky refinery, operated by Rosneft Oil Co., at night in Tuapse, Russia.
Andrey Rudakov | Bloomberg | Getty Images
Oil prices notched their biggest gain in nearly a year after OPEC+ announced it was slashing output by 1.16 million barrels per day.
Brent crude futures settled higher by 6.31%, at $84.93 a barrel. The commodity had its best daily performance since March 21, 2022, when it gained 7.12%. West Texas Intermediate crude settled higher by 6.28%, at $80.42 a barrel. It was the biggest daily gain for WTI since April 12, 2022, when it rose 6.69%.
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The voluntary cuts will begin in May and run until the end of 2023, Saudi Arabia announced, saying it was a “precautionary measure” targeted toward stabilizing the oil market.
The move comes on the back of Russia’s decision to trim oil production by 500,000 barrels per day until the end of 2023, according to the country’s Deputy Prime Minister Alexander Novak.
Russian Energy Minister Alexander Novak.
Leonhard Foeger | Reuters
“OPEC+’s plan for a further production cut may push oil prices toward the $100 mark again, considering China’s reopening and Russia’s output cuts as a retaliation move against western sanctions,” CMC Markets’ analyst Tina Teng told CNBC.
Teng noted, however, that the cut could also reverse the decline in inflation, which would “complicate central banks’ rate decisions.”
In March, oil prices tumbled to their lowest since December 2021, as traders feared the banking rout could dent global economic growth.
They’re looking into the second half of this year and deciding they don’t want to relive 2008.
Founder of Energy Aspects
The oil cartel and its allies are looking to avoid a repeat of the 2008 crash, one analyst said.
“They’re looking into the second half of this year and deciding they don’t want to relive 2008,” said Bob McNally, president of Rapidan Energy Group, citing oil prices crashing from $140 to $35 in six months in that year.
McNally added that while it’s not his base case, oil prices could “make a dash for $100 … if Chinese demand goes back to 16 million barrels a day second half of this year [and] if Russian supply starts to go off because of sanctions and so forth,”
“Then these cuts, if they stick with them, are going to super tighten the market,” he said.
The logo of the OPEC is pictured at the OPEC headquarters on October 4, 2022. In October last year, the oil cartel announced its decision to cut output by two million barrels per day.
Joe Klamar | Afp | Getty Images
However, some analysts say the latest cut is set to deliver a more significant impact than the one set last year.
“Most of the cuts will be made by countries that are producing at or above quotas, which implies a higher share of the announced cuts will translate into real supply reductions than in October 2022,” said Energy Aspects’ founder Amrita Sen, who also expects prices to hit $100 per barrel.
However, Sen holds the view that the output cut could potentially be reversed, hinging on easing global market pressures.
“I do believe if the market over tightens, exogenous issues or shocks fade, they will reverse this cut down the line so this isn’t set in stone for the rest of the year — but very clearly defending a [price] floor,” she said.
“Unlike [the cut in October], the momentum for global oil demand is up, not down with a strong China recovery,” Goldman Sachs also said in a note.
That could nudge up Goldman’s Brent forecasts by $5 per barrel to $95 per barrel for December 2023, the investment bank said in a note after the surprise decision overnight.
Goldman analysts led by Daan Struyven said the surprise cut is “consistent” with OPEC+’s doctrine to act preemptively.
“OPEC’s pricing power is higher than it has ever been,” Jeffrey Currie, Goldman Sachs’ global head of commodities research, said in an interview with CNBC’s “Squawk Box” Monday. “They are going to continue to exercise that power.”