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Oil market surges on shock output cuts

AFP News Agency by AFP News Agency
April 3, 2023
in Business, Latest, News
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Oil market surges on shock output cuts
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London: World oil prices soared Monday after several top producers led by Saudi Arabia sprang surprise output cuts that defied US calls for higher production to keep inflation down.

Crude futures surged almost eight percent at one stage after multiple members of the OPEC+ exporters’ alliance unexpectedly slashed production by a total of more than one million barrels per day in a bid to stabilise the market.

The shock reduction, unveiled  Sunday by Algeria, Iraq, Kuwait, Oman, Saudi Arabia and the United Arab Emirates, will start in May and last until the end of the year.

It came on top of a decision from OPEC+ member Russia to extend a cut of 500,000 barrels per day.

Caught markets off guard

Sunday’s move “caught the markets off guard” and reversed recent oil-price gains, noted ActivTrades analyst Ricardo Evangelista.

“With the fizzling out of the banking crisis and the return of optimism to the markets, the price of the barrel was already showing signs of recovering,” he noted.

“The OPEC+ announcement compounded this dynamic, taking oil prices back to pre-banking-crisis levels.”

The cut was the biggest since OPEC+ had late last year axed two million barrels per day in a move which had also angered Washington.

The news sparked bumper gains for European energy majors and lifted London and Paris stock markets on Monday, although Frankfurt dipped.

BP and Shell shares jumped about 4.5 percent in late morning London deals, while TotalEnergies won a similar proportion in Paris.

Higher oil prices boosts profits and revenues for the sector.

However, the shock weekend development also fanned concerns over a fresh spike in consumer prices that could put pressure on central banks to push interest rates even higher — and dent the global economy.

Rates higher for longer?

“There’s real concern that the surprise decision… will prompt central banks to maintain interest rates higher for longer, due to the inflationary impact, which will hinder economic growth,” said Nigel Green, head of financial consultancy deVere Group.

Global equities had been buoyed Friday after data highlighted easing inflation in the eurozone and the United States.

Russia’s invasion of Ukraine also sent oil and gas prices soaring last year, fuelling rampant energy bills and decades-high inflation around the world.

That sparked a series of aggressive interest rate hikes, particularly from the US Federal Reserve, in a bid to tame elevated consumer prices.

Green added that Sunday’s shock oil output cutback “will only add to pressing global inflationary squeezes”.

“The oil price rises can be expected to increase the cost of production and transportation, reduce consumers’ purchasing power, disrupt supply chains, and lead to higher inflation expectations.”

Crude prices have come down over the past year as concerns about a possible recession caused by higher borrowing costs have offset supply worries sparked by sanctions on Russia over its war on Ukraine.

“The production cut… clearly shows OPEC was not happy with the movement in the oil price which had fallen over recent months,” said National Australia Bank’s Tapas Strickland.

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