Surprise Opec+ crude cuts trigger fresh inflationary jolt

OIL surged at the week’s open after Opec+ unexpectedly announced crude output cuts that threaten to tighten the market, delivering a fresh inflationary jolt to the world economy and irking the White House.

West Texas Intermediate soared as much as 8 per cent, the biggest intraday move in more than a year, before trading above US$81 a barrel. The Organization of Petroleum Exporting Countries and allies including Russia (Opec+) on Sunday (Apr 2) pledged to make the production cuts starting next month that will exceed 1 million barrels a day, with Saudi Arabia leading the way with 500,000 barrels of cuts to daily output. The market had expected Opec+ to hold production steady.

Aside from the reduction from Saudi Arabia and other Middle Eastern countries, Russia also pledged to keep production at a reduced level. The White House said the Opec+ decision was ill-advised, while adding the US would work with producers and consumers with a focus on petrol prices for Americans.

Crude is entering April after capping its worst first-quarter drop since 2020, when the pandemic pummeled demand. Futures have whipsawed as traders weighed near-term risks from a banking crisis to strikes in France, although there’s widespread optimism that China’s rebound can underpin higher prices over the rest of the year.

“Today’s move, like the October cut, can be read as another clear signal that Saudi Arabia and its Opec partners will seek to short circuit further macro selloffs,” RBC Capital Markets analysts including Helima Croft said in note. “This decision will certainly not be welcomed by the White House.”

Costlier crude prices threatens to spur still-elevated inflation, complicating the task facing central banks including the Federal Reserve to tame price pressures. Ahead of the surprise move by Opec+, many investors had expected that the Fed may refrain from hiking rates at its next meeting in May.

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Opec+ announces surprise oil cuts; US calls move inadvisable

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Goldman Sachs Group raised its price forecasts for Brent after the announcement. “Opec+ has very significant pricing power relative to the past, and today’s surprise cut is consistent with their new doctrine to act pre-emptively,” analysts including Jeffrey Currie said in a note.

News of the cuts overshadowed relief for the market from an agreement between Iraq’s semi-autonomous Kurdistan region and the federal government to resume oil exports through Turkey this week. The interruption to supply had helped WTI to rally more than 9 per cent last week. BLOOMBERG