Oil prices have surged in today’s trading after OPEC and its allies including Russia, known as OPEC+, announced surprise cuts to output yesterday.
Brent Crude had soared 5.41 per cent by late morning – to $84.21 a barrel- while WTI Crude skyrocketed 5.59 per cent to $79.90 per barrel, with investors regaining confidence in the commodity amid growing expectations of tighter supply margins this year.
The cuts are on top of the 2m barrel per day (bpd) reduction it agreed last November, which runs until the end of the year.
It had been widely expected that OPEC+ would only maintain the 2m cuts ahead of its meeting later today.
The pledges bring the total volume of cuts by OPEC+ to 3.7 per cent of global demand, according to calculations from news agency Reuters.
Prior to the announcement, both benchmarks had been treading water after a severe downturn from last month’s banking crisis.
The upsurge in prices reflects a remarkable recovery for oil markets – with Brent Crude dipping month towards $70 per barrel – 15 month low – following the collapse of financial institutes Silicon Valley Bank and Signature, alongside the last-minute forced merger of UBS and Credit Suisse.
This spooked investors, with growing fears global banking crisis could spiral into a recession and rising interest rates would hit demand.
However, following OPEC+’s latest cuts, Goldman Sachs has slashed its end-2023 production forecast for OPEC+ by 1.1m bpd and raised its Brent price forecasts to $95 and $100 per barrel for 2023 and 2024, respectively.
OPEC and Paris-based climate agency the International Energy Agency both posted bullish forecasts for annual oil demand in their monthly outlooks last month.
Jorge Leon, senior vice president at consultancy Rystad Energy, said: “From a supply side perspective, the cuts signal the group is willing to defend a price floor well above $80 per barrel and prioritize revenue versus market share. From a demand-side perspective, these cuts may be signaling that OPEC+ believes that there are enough recessionary indicators in the market.
He revealed that Rystad Energy believes that these voluntary cuts will further tighten the oil market and “could push prices above $100 per barrel and keep them above that level for most of the rest of the year.”
Bjarne Schieldrop, chief commodity analyst at SEB, argued the move reflect the cartel’s political nous and ability to sense dangers in the market.
He said: “What we are witnessing is an adaptive and agile OPEC+ group which is able and willing to act ahead of the curve. The recent market turmoil where Brent crude dropped to $70 per barrel probably gave OPEC+ a bit of a scare.
“They will have nothing of it. The rapidly rising US interest rates and the cracks in the walls of the US and European banking systems has given associations to the Global Financial Crisis. With fears that the banking system will break, the economy will stop and the oil price will drop.”