Filenews 3 April 2023
Oil rose sharply at the opening of the week after OPEC+ unexpectedly announced crude production cuts that threatened to tighten the market, sending a fresh inflationary jolt to the global economy and causing nervousness in the White House.
U.S. West Texas Intermediate crude earlier jumped as much as 8%, its biggest one-day move in more than a year, trading at $79.81 a barrel at 11:20 a.m. Singapore time, while broader markets saw the dollar strengthen along with U.S. Treasury yields.
The Organization of the Petroleum Exporting Countries and its allies, including Russia, pledged on Sunday to make cuts from next month that will exceed 1 million barrels per day, with Saudi Arabia leading the way with 500,000 barrels. Traders had expected OPEC+ to keep output stable. The shock move came outside the cartel's planned timeline for reviewing the market and supply on behalf of its members.
At 8:48 a.m. Cyprus time, global benchmark June Brent crude was up 4.54 percent at $83.52 a barrel, while across the Atlantic, U.S. May WTI crude was up 4.47 percent at $79.12. the barrel.
The impact of the decision was quickly felt on the global oil market. Goldman Sachs raised its price forecast for this year and next, key prices on schedules rose higher as a sign of expectations of tighter supply, and a typically calm Asian session saw hundreds of thousands of contracts change hands. U.S. gasoline futures also rose, underscoring inflationary risks.
"This measure sends a very strong signal to the market that they're going to support prices," Daniel Hynes, senior commodities analyst at Australia & New Zealand Banking, told Bloomberg TV, adding that the likelihood of crude oil reaching $100 again "has definitely increased."
The White House said OPEC+'s decision was wrong, adding that the United States would work with producers and consumers with a focus on gasoline prices. Last year, President Joe Biden ordered an unprecedented release from the country's strategic crude oil reserves following Russia's invasion of Ukraine.
Ahead of a surprise intervention by OPEC+, crude oil pared its worst first-quarter decline since 2020 as turmoil in the banking sector and recession risks in the U.S. combined to hit prices. However, many market watchers have said they expect a resurgence in the second half, which is supported by a surge in demand in China following the end of Covid Zero.
The task of the Fed
More expensive crude prices threaten to stimulate still-elevated inflation, complicating the task facing central banks, including the Federal Reserve, to tame persistent price pressures. The Fed raised interest rates again last month, and its officials are scheduled to meet in May to recalibrate monetary policy.
News of the cuts overshadowed market relief from an agreement between the semi-autonomous Iraqi Kurdistan region and Iraq's federal government to resume oil exports through Turkey this week. The supply disruption had led WTI to rally more than 9% last week.
The OPEC+ move "has the potential to push the market into a supply deficit in the second quarter, versus previous expectations for a surplus," said Vandana Hari, founder of Vanda Insights in Singapore. But higher prices may dampen some demand, as well as exacerbate persistent inflation that central banks are trying to combat, increasing recession risks, he added.
