Oil surges as OPEC+ surprise output target cuts shake markets

After a surprising agreement by OPEC+ to reduce additional output, oil prices soared on Monday, registering their largest daily increase in over a year.

After reaching its highest price in a month at $86.44, Brent crude was up $4.64, or 5.8%, to $84.53 a barrel as of 11:15 GMT.

After reaching its highest point since late January, West Texas Intermediate oil U.S. was trading at $80.23 a barrel, up $4.56 or 6%.

The announcement of additional production goal cuts of around 1.16 million barrels per day (bpd) on Sunday by the Organization of the Petroleum Exporting Countries and their allies, including Russia, jolted the markets.

During its monthly meeting on Monday, the group, known as OPEC+, was anticipated to uphold its prior commitment to reduce output by 2 million bpd until December.

According to calculations by Reuters, the promises raise the overall amount of cutbacks by OPEC+ to 3.66 million bpd, or 3.7% of world demand.

As a result, Goldman Sachs increased its Brent price projections for 2023 and 2024 to $95 and $100 a barrel, respectively, and decreased its OPEC+ production forecast for end-2023 by 1.1 million bpd.

The Biden administration said the move announced by the producers was unadvisable and some analysts questioned OPEC+’s rationale for the extra production cut.

According to Jorge Leon, senior vice president at the consultancy Rystad Energy, the move shows that OPEC+ is committed to act despite the potential economic storm clouds in the distance.

“These cuts may be signaling that OPEC+ believes that there are enough recessionary indicators in the market … (and) will further tighten the oil market for the rest of the year and could push prices above $100 per barrel”. according to reuters

These cutbacks might be an indication that OPEC+ thinks there are sufficient signs of a recession in the market; they will further tighten the oil market for the remainder of the year and could raise oil prices beyond $100 per barrel.

Despite decreased OPEC oil supply in March owing to a suspension of certain Iraqi shipments, Brent slid last month near $70 a barrel, the lowest in 15 months, on worries that the demand would be impacted by the global financial crisis and increasing interest rates.