Oil Prices Soar After OPEC’s Shock Production Cut

The sun behind a crude oil pump jack in the Permian Basin in Loving County, Texas on Nov. 22, 2019. Angus Mordant/Reuters

Oil prices surged over 5 percent on Monday, notching their biggest daily jump in nearly a year after OPEC+ surprised markets on Sunday by announcing production cuts.

In early trading Monday, the U.S. crude oil benchmark West Texas Intermediate (WTI) rose $4.38 to $80.03 per barrel, or 5.79 percent, according to TradingView data.

Brent crude, the pricing basis for international oils, gained $4.65 to $84.38 per barrel, or 5.83 percent.

The sharp price jumps come as markets digest Sunday’s shock decision by members of the so-called OPEC+ alliance of oil exporting countries to slash production by 1.15 million barrels per day (bpd), mostly by Russia and Saudi Arabia. The cuts are due to start in May and run through the end of the year.

Saudi Arabia will cut its oil production by 500,000 bpd, with a Saudi energy official describing the decision as a “precautionary measure” aimed at “supporting the stability of the oil market.”

Russia, which has already been reducing oil production by 500,000 bpd since March in response to Western sanctions over its invasion of Ukraine, also confirmed that it will be extending its original three-month cut by another six months.

“As responsible and preemptive actions, Russia will extend its voluntary oil production reduction by 500,000 barrels a day until the end of 2023 from the average production level in February established in conformity with independent sources,” Russian Deputy Prime Minister Alexander Novak said, according to state-owned media outlet TASS.

Other OPEC+ members also followed suit. Iraq announced a cut of 211,000 bpd, followed by the United Arab Emirates (144,000 bpd), Kuwait (128,000 bpd), Kazakhstan (78,000 bpd), Algeria (48,000 bpd), and Oman (40,000 bpd).

Following OPEC’s surprise announcement, Goldman Sachs analysts raised their Brent price forecasts to $95 a barrel for 2023 and to $100 a barrel in 2024.

Knock-On Impact

Experts say OPEC’s oil production cuts will put upward pressure on gasoline prices but lingering economic worries could keep pump costs constrained.

“I would largely expect oil prices to rise $3-$6 per barrel as the market prices this in, but again, to the motorist filling up, the initial effect will be limited to a ball park of 5-15c/gal,” Patrick De Haan, head of petroleum analysis at GasBuddy, said in a post on Twitter.

De Haan said earlier he expects the crude cuts to have an impact on summer gas prices “but economic concerns may persist, so to me this isn’t a huge game changer.”

Tom Kloza, founder of Oil Price Information Service, said in a Twitter post that he expects hikes of between 8 and 12 cents per gallon on gasoline and diesel owing to the cuts.

The national average gasoline price was $3.506 per gallon on Monday, up around 7 cents compared to a week ago, according to AAA data.

“Very robust demand” for gasoline, combined with rising crude prices, has sent pump prices higher over the past week, according to Andrew Gross, AAA spokesperson.

Higher oil prices mean higher inflationary pressures, which could send the Federal Reserve on a more hawkish tilt.

“A higher oil price will put pressure on global inflation and if we assume the banking turmoil continues to reside then the markets will increasingly focus on the inflation outlook,” said Mohamad Al-Saraf, a strategist at Danske Bank.

Since OPEC’s announcement, markets have boosted their expectations for the Fed’s rate hikes. The CME Fed Watch Tool indicates that the odds of a 25 basis point rise at the central bank’s next policy meeting had risen to 57 percent on Monday from 48 percent on Friday.

“With oil prices going up it could be a trigger to reverse Fed rate cut pricing,” Al-Saraf added.

The U.S. Commerce Department reported on Friday that the Personal Consumption Expenditures price index, a measure of inflation closely watched by the Fed, rose 5.0 percent in February year-over-year. That was a slight deceleration from the 5.3 percent increase in January.

Core inflation, considered a more accurate predictor of future price hikes, came in at 4.6 percent year-over-year.

Bill Pan contributed to this report.