Oil built on the largest gain in a year after OPEC+ set out to punish short sellers with a surprise production cut that tightened the global market and widened key timespreads.
(Bloomberg) — Oil built on the largest gain in a year after OPEC+ set out to punish short sellers with a surprise production cut that tightened the global market and widened key timespreads.
West Texas Intermediate was above $81 a barrel after closing more than 6% higher on Monday. The surprise reduction wrong-footed the market, and prompted many banks to raise price forecasts, although some bears remain. The gap between the nearest two December contracts for Brent rose to $5.84 a barrel in backwardation — a bullish pattern — from $3.80 on Friday.
The move was aimed at catching out speculators that have been betting that oil prices would fall. The Organization of Petroleum Exporting Countries and its allies began to see the need for a change in policy on March 20, according to people familiar with the matter, when Brent slid to a 15-month low near $70 a barrel as a banking crisis threatened to hobble the economy.
“It’s very much about driving shorts out of the market,” Amrita Sen, director of research at Energy Aspects Ltd., said in a Bloomberg television interview on Monday. She expects oil to reach $100 a barrel in the second half of the year, but the output reduction could take it to that level as early as this quarter.
Crude has soared about 20% from the low point in mid-March. The rebound was driven initially by expectations Chinese demand would pick up following the end of restrictive Covid policies. The OPEC+ decision to remove more than 1 million barrels of daily output has now supercharged the market.
Many on Wall Street including Goldman Sachs Group Inc. upgraded their price forecasts in the wake of the decision. But Morgan Stanley lowered its outlook, noting China’s demand growth has lagged behind expectations. Citigroup Inc. also rebuffed talk of a swift rally back to $100 a barrel.
“OPEC now has very significant pricing power relative to the past,” Goldman Sachs analysts including Daan Struyven said in a note. Saudi Arabia, the UAE, and Kuwait are expected to be fully and “almost immediately” compliant with the cuts, while adherence from Iraq may be more gradual and imperfect, they said.
There’s concern that the production cuts will inject fresh vigor into inflation, with US Treasury Secretary Janet Yellen criticizing the group’s decision as “unconstructive.” Still, President Joe Biden downplayed the issue, saying late on Monday its impact is likely not “as bad as you think.”
The market largely ignored the potential resumption of oil exports from Iraq’s semi-autonomous Kurdistan region on Tuesday. The region’s government said it will sign an agreement that may clear the path to restart shipments via the Turkish port of Ceyhan. About 400,000 barrels a day of flows have been halted following a legal dispute.
“You don’t want to be short oil at current price levels,” said Giovanni Staunovo, commodity analyst at UBS Group AG.
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