The Organisation of Petroleum Exporting Countries has announced a surprise decision to cut production further, which caused oil prices to surge on Monday.
Brent crude rose by 5.5% to $84.26 a barrel, after hitting $86.44, the highest it has been in a month while US West Texas Intermediate crude was up 5.6% to $79.90 a barrel, which is the highest level since late January.
The production cuts amount to about 1.16 million barrels per day, bringing the total volume of cuts by OPEC+ to 3.66 million bpd, which is equal to 3.7% of global demand. Top producer Saudi Arabia called it a “precautionary measure to support market stability”.
However, the Biden administration has expressed its disapproval of the move, and some analysts have questioned the rationale behind the extra production cut.
Founder of oil market analysis provider Vanda Insights, Vandana Hari, said, “It’s hard to buy the ‘pre-emptive’ and ‘precautionary’ reasoning – especially now when the banking crisis had tailed off and Brent had crawled back up towards $80 from its 15-month lows earlier in March.”
Analysts at JP Morgan also said that the slow response to weaker prices would have a limited impact on overall balances and could delay the price impact.
Goldman Sachs, on the other hand, has adjusted its forecast for OPEC+ production and raised its Brent price forecast to $95 and $100 a barrel for 2023 and 2024, respectively. The output reduction could provide a 7% boost to oil prices, contributing to higher Saudi and OPEC+ oil revenues.
RBC Capital analyst Helima Croft said, “The bottom line is Washington and Riyadh simply have different price targets for their key policy initiatives.”
Meanwhile, US crude production rose in January to 12.46 million bpd, the highest it has been since March 2020, according to Energy Information Administration data.