Following the unexpected announcement by OPEC+ that it would be cutting oil production by 1.16 million barrels per day (bpd), oil surged by as much as 6% during in early trading before ending the session having rallied the most in more than a year. The surge threatens to hit the world economy with yet another jolt of inflation, just as it was hoping to create some stability following the banking crisis.
The Organization of Petroleum Exporting Countries and allies, including Russia, also known as OPEC+, pledged to maintain its cut of more than a million barrels per day through the end of the year, in a surprise announcement which caught the markets off guard, coming outside of its normal scheduled timetable for reviewing market conditions and issuing such decisions..
Independently, Russia had already pledged to cut its production by 500,000 barrels per day as a response to Western sanctions and price caps imposed upon its sales in the West. Following the announcement, Moscow pledged to coordinate its cut with OPEC+, extending it until the end of the year.
The decision immediately threw WTI’s prompt spread into backwardation for the first time since December, indicating a fresh bullish stance as traders see supply being outstripped by demand.
Goldman Sachs immediately lifted its price forecasts for this year and 2024, as US gasoline futures also surged, and fears of inflation grew as well.
Nadia Martin Wiggen, a partner at Pareto Securities said, “OPEC+ shows commitment to protecting against the downside. The duration of the cut is the most surprising and bullish part.”
Before the announcement of the production cut, crude had endured a 5.7% quarterly fall as the banking crisis loomed, and investor fear over a potential recession dominated. Analysts had expected the price to rebound in the second half as China’s economy spun up and perhaps drove away recessionary concerns with it.
Despite the rush of analysts raising their price forecasts following the decision, Morgan Stanley pointed to China’s lagging demand growth, and lowered its price forecast in spite of the decision.
The White House called the decision “ill-advised,” adding that it intended to implement measures to contain gasoline prices in the US. Analysts predict the cartel’s decision could add over 50 cents per gallon to the price of gasoline, just as the US driving season is about to begin. Last year, faced with similar pressures at the gas pump following Russia’s invasion of Ukraine, President Joe Biden had ordered unprecedented releases from the nation’s Strategic Petroleum reserve, which have yet to be replenished, as the reserve presently sits at its lowest level since 1983.
The move threatens to exacerbate inflation at the very moment analysts were hoping the Federal Reserve would begin to back off on interest rate hikes to avoid worsening the banking crisis. Last month the Federal Reserve implemented a 50 basis point interest rate hike despite a wave of bank failures which many analysts had attributed to its hawkish monetary policy in confronting inflation.
