Oil prices surged by as much as 8% following the surprise announcement by petroleum-producing countries that make up the OPEC+ cartel that they would slash collective output by some 1.16 million barrels per day.
Brent crude on Monday recent rose by some 5% to around $84 a barrel while US West Texas Intermediate was up by as much as 5.2% to $79.64 a barrel in trading early Monday morning.
Observers on Wall Street say that the OPEC+ cuts, which could push the price of oil to around $100 a barrel, will make it more likely that the Federal Reserve will once again hike interest rates during its next meeting in May.
The move is likely to drive up gas prices at the pump for Americans while bolstering the coffers of Russian President Vladimir Putin as his military remains bogged down in its invasion of Ukraine.
Higher gas prices will further drive up inflation — which will make the Fed more inclined to raise rates in an effort to bring costs down, John Roe, the head of Legal and General Investment Management, told The Wall Street Journal.
The cut in oil production was also likely to further strain ties with the US, which has called on Saudi Arabia and other allies to increase production as it tries to bring prices down and squeeze Russia’s finances.
Goldman said strategic petroleum reserve releases in the US and France, due to ongoing strikes, as well as Washington’s refusal to refill its SPR in the 2023 fiscal year, may have prompted the OPEC+ action.
Higher prices will likely spell more income for Moscow to fund its expensive war in Ukraine, upsetting Saudi-US relations further, Schieldrop said.
“The US administration may also argue that higher oil prices will counter its efforts to put out the inflation fire,” he added.
Saudi Arabia and other top oil producers, including non-OPEC members such as Russia, said that they would cut output by a half a million barrels a day beginning in May and extending through the end of the year.
OPEC+ had been expected to hold output steady this year, having already cut by 2 million barrels per day in November 2022.
Saudi Arabia said its voluntary output cut was a precautionary measure aimed at supporting market stability.
Russian Deputy Prime Minister Alexander Novak said on Monday that interference with market dynamics was one of the reasons behind the cuts.
“The new cuts are underpinning that the OPEC+ group is intact and that Russia is still an integral and important part of the group,” SEB analyst Bjarne Schieldrop told Reuters.
Rystad Energy said it believed the cuts will add to tightness in the oil market and lift prices above $100 a barrel for the rest of year, possibly taking Brent as high as $110 this summer.
UBS also expects Brent to reach $100 by June, while Goldman Sachs raised its December forecast by $5 to $95.
An official at a South Korean refiner said the cut was “bad news” for oil buyers and OPEC was seeking to “protect their profit” against concerns of a global economic slowdown.
Tighter OPEC+ supply will also be negative for Japan as it may further boost inflation and weaken its economy, said Takayuki Honma, chief economist at Sumitomo Corporation Global Research.
“Producing countries apparently want to see oil prices rise to $90-$100 per barrel, but higher oil prices also mean higher risk of economic downturn and sluggish demand,” he added.
With Post wires