Oil surged after OPEC+ unexpectedly announced crude output cuts that threaten to tighten the market, delivering a fresh inflationary jolt to the world economy and irking the White House.
(Bloomberg) — Oil surged after OPEC+ unexpectedly announced crude output cuts that threaten to tighten the market, delivering a fresh inflationary jolt to the world economy and irking the White House.
West Texas Intermediate soared as much as 8%, the biggest intraday move in more than a year, and traded at $79.95 a barrel at 10:03 a.m. in London. In wider markets, the dollar advanced along with Treasury yields.
The Organization of Petroleum Exporting Countries and allies including Russia pledged on Sunday to make cuts exceeding 1 million barrels a day from next month, with Saudi Arabia leading the way with 500,000 barrels. Traders had expected OPEC+ to hold output steady. The shock move came outside the group’s scheduled timetable for reviewing the market and members’ supply.
The impact was quickly felt across the global oil market. Goldman Sachs Group Inc. lifted price forecasts for this year and next, key timespreads surged higher in an indication of expectations of tighter supply, and a usually quiet Asian trading session saw hundreds of thousands of contracts change hands. US gasoline futures also surged, underscoring the inflationary risks.
“The decision was made to ensure stability and to pre-empt a potential slowdown in global demand growth,” said Ole Hansen, head of commodity strategy at Saxo Bank A/S. “The group wanted to protect their most prized asset from a slump.”
The White House said the OPEC+ decision was ill-advised, while adding the US would work with producers and consumers with a focus on gasoline prices. Last year, President Joe Biden ordered an unprecedented release from the nation’s strategic crude reserves after Russia invasion of Ukraine.
Ahead of the surprise intervention, crude capped its worst first-quarter drop since 2020 as banking sector turmoil and risks of recession in the US combined to hurt prices. Still, many market watchers have said they expect a revival in the second half, underpinned by rising demand in China after Covid Zero ended.
Fed’s Task
Costlier crude prices threaten to spur still-elevated inflation, complicating the task facing central banks including the Federal Reserve to tame persistent price pressures. The Fed raised interest rates again last month, and officials are next scheduled to meet in May to set monetary policy.
News of the cuts overshadowed relief for the market from an agreement between Iraq’s semi-autonomous Kurdistan region and the federal government to resume oil exports through Turkey this week. The interruption to supply had helped WTI to rally more than 9% last week.
The OPEC+ “move has the potential to push the market into a deficit in the second quarter, versus earlier expectations of a surplus,” said Vandana Hari, founder of Vanda Insights in Singapore. Still, higher prices may curtail some demand, as well as exacerbate the stubborn inflation that central banks are trying to combat, adding to recessionary risks, she added.
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–With assistance from Rob Verdonck, Elizabeth Low and Alex Longley.
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