Oil prices spiked late Sunday, after Saudi Arabia led a surprise oil production cut across several OPEC+ nations that will remove more than 1 million barrels of oil a day from May.
In an announcement on Sunday, Saudi Arabia's Ministry of Energy stated that the kingdom will implement a voluntary cut of 500,000 barrels a day from May until the end of 2023, in conjunction with other countries.
It said that the "voluntary cut is in addition to the reduction in production" agreed at the OPEC meeting in October and "is a precautionary measure aimed at supporting the stability of the oil market." OPEC+ agreed in October to cut production by two million barrels a day from November, a move that angered the Biden administration.
Russia's deputy prime minister, Alexander Novak, said his country would extend a March production cut of 500,000 barrels a day through the end of the year. OPEC+ is made up of members of the Organization of the Petroleum Exporting Countries and its allies, including Russia.
Today, the world oil market is experiencing a period of high volatility and unpredictability due to the ongoing banking crisis in the U.S. and Europe, global economic uncertainty and unpredictable and shortsighted energy policy decisions. At the same time, predictability in the global oil market is a key element in ensuring energy security," Novak said in a statement.
News of the production cuts sent prices soaring late Sunday. Front-month West Texas Intermediate crude for May delivery topped $80 a barrel while Brent crude , the global benchmark, surpassed $85 a barrel.
The cuts come after a first quarter that saw a sharp decline in crude prices. Oil bulls were disappointed that China's lifting of strict COVID curbs didn't provide stronger support to prices, while aggressive tightening by central banks and fears that banking woes in the U.S. and Europe could turn into a full-fledged crisis stoked recession fears.
West Texas Intermediate crude for May delivery, which ended at $75.678 a barrel on Friday, suffered a March loss of 1.8% and a quarterly decline of 5.7%, according to Dow Jones Market Data. Brent crude fell 4.9% in March and 7.2% in the first quarter, ending Friday at $79.77 a barrel.
Elsewhere, Kuwait's oil ministry said the country will cut 128, 000 barrels a day, while the United Arab Emirates said it would cut its production by 144,000 barrels a day, according to a statement by Energy Minister Suhail Al Mazrouei, reported by Attaqa Breaking News. Oman said it would implement a voluntary cut of 40,000 barrels a day. Kazakhstan said it would cut by 78,000 barrels a day and Algeria said it would cut by 48,000 barrels a day.
Ole Hansen, chief commodities strategist at Saxo Bank, said the announcement "came out of the blue."
Producers were clearly frustrated by the recent slump which was speculative more than fundamentally driven. They will likely achieve a return to the $80s while also trying to pre-empt a smaller than expected increase in global oil demand in the coming months. Remember most of the +2 m b/d increase expected for this year is backloaded into the second half with plenty of room for error should economic slowdown be as severe as currently priced in by the market through expectations of U.S. rate cuts," Hansen told MarketWatch.
The Saudi oil minister love[s] to wrong foot the market, especially when it comes to hurting speculative short sellers," said Hansen.
The move also comes as the U.S., Europe and elsewhere continue to battle inflation. Oil prices have fallen sharply over the last 12 months, after spiking to more than $120 a barrel following Russia's invasion of Ukraine last year. Brent was down roughly 24% from a year earlier at Friday's close.
The new cuts, if fully implemented, should make for a significant draw on crude inventories in the second quarter as opposed to previous expectations for an early third-quarter draw, said Giacomo Romeo, energy equity analyst at Jefferies, in a note.
The only potential downside to this decision is that bears in the market could perceive the cut as a validation of the recent demand concerns," he wrote, noting that compliance with past targets has also been in issue.
The U.A.E., for example, was seen producing around 200,000 barrels a day above its target for a few months, while Russian output in March didn't see the full 500,000 barrel-a-day reduction announced in February, Romeo noted.
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