Crude oil increases by $5/bbl as a surprise Market shock from OPEC+ output cutbacks

The unexpected declaration by OPEC+ to further reduce output in an effort to sustain market stability caused an increase in oil prices of approximately $5 per barrel on Monday. In the opening, Brent crude reached its highest price in almost a month, trading at $84.95 a barrel, up $5.06 or 6.3%. With a price of $80.47 per barrel, up $4.80 or 6.3%, U.S. West Texas Intermediate crude reached its highest level since late January. Markets were rocked on Sunday when the Organization of the Petroleum Exporting Countries and their allies, including Russia, announced production cutbacks of approximately 1.16 million barrels per day.

At its monthly meeting on Monday, the group known as OPEC+ was anticipated to keep its prior choice to reduce output by 2 million bpd until December. OPEC+ has now committed to cutting 3.66 million bpd of oil production, or 3.7% of global demand, according to calculations by Reuters. Hence, according to a letter from Goldman Sachs’ analysts, the company cut its OPEC+ production forecast for the end of 2023 by 1.1 million bpd and increased its estimates for the 2023 and 2024 Brent prices to $95 and $100 per barrel, respectively.

Despite lower OPEC oil supply in March owing to oilfield maintenance in Angola and a stop in some of Iraq’s exports, Brent slid last month towards $70 a barrel, the lowest in 15 months, on worries that a worldwide banking crisis and increasing interest rates would hurt demand. According to RBC Capital analyst Helima Croft, “today’s move, like the October cut, can be viewed as another unambiguous signal that Saudi Arabia and its OPEC partners would strive to short circuit further macro sell-offs and that Jay (Jerome) Powell is not the only central banker that matters.”

The top crude importer China’s demand rebound and production curbs by OPEC+, according to analysts at the National Australia Bank, may push oil prices beyond $100 per barrel during the third quarter. “Despite the most recent production reductions, Saudi Arabia still has sufficient headroom above its historical production lows to reduce global supply even further if necessary to preserve market equilibrium and prices from here,” they noted. At 12.46 million barrels per day (bpd), U.S. crude output increased in January, reaching its highest level since March 2020, according to Energy Information Administration (EIA) figures released on Friday.

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