(Reuters) Following a shock announcement by OPEC+ to cut more production, oil prices spiked on Monday, posting the largest daily increase in almost a year.
Brent crude reached its highest price in a month at $86.44 earlier in the session. By 0627 GMT, it was trading at $83.89 per barrel, up $4 or 5%.
U.S. West Texas Intermediate crude had previously reached its highest level since late January and was now trading at $79.39 per barrel, up about $4 or 5%.
The announcement of additional production cuts of about 1.16 million barrels per day (bpd) on Sunday by the Organization of the Petroleum Exporting Countries and their allies, including Russia, jolted the markets.
At its monthly meeting on Monday, the group, known as OPEC+, was anticipated to uphold its earlier decision to reduce output by 2 million bpd until December.
According to calculations by Reuters, the pledges bring the total amount of cuts by OPEC+ to 3.66 million bpd, or 3.7% of global demand.
In response, Goldman Sachs decreased its OPEC+ production forecast for the end of 2023 by 1.1 million bpd and increased its Brent price forecasts for the years 2023 and 2024 to $95 and $100 per barrel, respectively, according to a note from its analysts.
According to Goldman Sachs, the output cut could raise oil prices by 7%, increasing Saudi Arabia’s and OPEC+’s oil revenues.
The Biden administration deemed the producers‘ announcement to be a bad idea.
Analysts questioned the justification given by OPEC+ for the additional production cut.
Vandana Hari, founder of Vanda (NASDAQ:VNDA) Insights, a provider of oil market analysis said: „It’s hard to buy the ‚pre-emptive‘ and ‚precautionary‘ reasoning – especially now, when the banking crisis had tailed off and Brent had crawled back up towards $80 from its 15-month lows earlier in March.“
Despite lower OPEC oil output in March due to oilfield maintenance in Angola and a halt in some Iraqi exports, Brent fell last month toward $70 a barrel, the lowest in 15 months, on worries that a global banking crisis and rising interest rates would hurt demand.
Helima Croft, an analyst at RBC Capital Markets, stated: „Today’s move, like the October cut, can be read as another clear signal that Saudi Arabia and its OPEC partners will seek to short circuit further macro selloffs and that Jay (Jerome) Powell is not the only central banker that matters.“
She later added: „The bottom line is Washington and Riyadh simply have different price targets for their key policy initiatives.“
The move came later than anticipated, according to analysts at JPMorgan (NYSE:JPM), and the slow response to lower prices would have a limited impact on supply-demand balances as well as delay the effect on prices.
They stated that, „since November, our global oil supply-demand balance suggested that a strong policy action was needed to keep global oil surpluses in check.“
Energy Information Administration (EIA) data showed on Friday that U.S. crude production increased in January to 12.46 million barrels per day (bpd), which was the highest level since March 2020.
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