- On Sunday, OPEC+ announced an unexpected supply cut of more than 1 million barrels a day.
- Oil prices surged Monday, with Brent crude hovering near $85 a barrel.
- The production cuts were spread among OPEC members. Saudia Arabia led the way with a 500,000 barrel cut.
Oil prices surged 6% Monday following OPEC+’s announcement that it would slash production by more than 1 million barrels per day.
Prices soared as much as 8% before paring the biggest gains. Brent crude, the international oil benchmark, was trading just under $85 a barrel Monday morning, up from $76 a barrel a week ago.
The group stated the move was precautionary and meant to ensure market stability. The reductions were spread out across member nations, with Saudi Arabia leading the way with a 500,000 barrel-a-day cut.
Energy Aspects analyst Livia Gallarati told Insider that the firm already anticipated oil spiking in 2023 before the production cuts, given higher demand amid China’s reopening. But with OPEC+’s latest initiative, she said the market will become more constrained.
“Now we have these OPEC+ production cuts, which will definitely tighten the market, at least allowing for stockdraws to start,” Gallarati said Monday. “We continue to believe we will see $100 oil this year.”
OPEC+’s pricing power is as strong as it’s ever been, according to Goldman Sachs’ global head of commodities research, Jeff Currie.
A lack of investment in oil production makes other global producers unable to respond, Currie said in a CNBC interview Monday. This opens the door for OPEC+ to wield its influence over the market.
“This is a revenue-maximizing decision for OPEC under all the different scenarios,” he said. “It was a voluntary cut, it is not violation of the agreement…what they were responding is a precautionary movement to potential physical weakness but also, hey, they have the market power to respond to that paper weakness as well.”
OPEC’s production cut will be on top of Russia’s previously stated plans to reduce output, as Moscow has said it would slash production by 500,000 barrels a day.
That means the total decrease could be as high as 1.65 million barrels per day through the second half of the year, analysts from energy consultant Facts Global Energy wrote in a note Monday.
“For Russia, further extending its unilateral cuts makes sense, especially with some of the other OPEC+ members now joining it in reducing output,” FGE said. “Russia is seeking both high prices and to minimise the large discounts associated with pushing marginal barrels into distant (mainly Asian) markets. The new cuts will help accomplish both aims.”