Oil prices experienced a significant surge on Monday following an unexpected announcement by OPEC+ to further decrease production.
Top producer Saudi Arabia stated this is a precautionary measure to support market stability. During the trading session, Brent crude reached its highest monthly level at $86.44 per barrel before settling at $84.26, a 5.5% increase. Meanwhile, US West Texas Intermediate crude climbed to its highest level since late January before trading at $79.90 a barrel, a 5.6% rise.
The Organization of the Petroleum Exporting Countries (OPEC) and their allies, including Russia, shocked the markets by announcing production cuts of about 1.16 million barrels per day (bpd) on Sunday. The group, known as OPEC+, was initially expected to maintain its earlier decision to reduce oil production by 2 million bpd until December during its monthly meeting on Monday.
These pledges bring OPEC+’s total oil production cuts by OPEC+ to 3.66 million bpd, equal to 3.7% of global demand. Consequently, Goldman Sachs adjusted its end-2023 production forecast for OPEC+ downwards by 1.1 million bpd, raising its Brent price forecasts for 2023 and 2024 to $95 and $100 a barrel, respectively. Goldman estimated that the output reduction could provide a 7% boost to oil prices, resulting in higher revenues for Saudi Arabia and OPEC+.
The Biden administration criticized the OPEC oil cuts, calling them unwise. Some analysts questioned the rationale behind the additional production cut by OPEC+. Vandana Hari, the founder of oil market analysis provider Vanda Insights, expressed skepticism towards the “pre-emptive” and “precautionary” reasoning, especially given the recent banking crisis and Brent’s recovery towards $80 from its 15-month lows in March.
Analysts at JP Morgan noted that the move came later than expected and that the slow response to weaker prices might have a limited impact on overall balances and could delay the price impact. US crude production increased in January to 12.46 million bpd, the highest since March 2020, according to Energy Information Administration (EIA) data.
