If delivered the cuts would further restrict an already tight oil market that could push crude prices to US$110 a barrel by summer, said Rystad Energy’s senior vice president Jorge Leon in an extraordinary market update today.
Saudi Arabia will shoulder most of the cuts, reducing output by 500,000 bpd, said Rystad. Other participants are UAE, Kuwait, Iraq, Oman, Algeria and Kazakhstan. Russia is extending its existing 500,000 bpd cut until the end of the year.
The fact that all these countries have compliance levels close to 100 per cent with current OPEC+ quotas suggest the voluntary cuts will become reality, said Rystad.
From the supply side, the cuts signal OPEC+ is willing to defend a price well above US$80 a barrel; on the demand side, they may signal that the group believes there are enough recessionary signs in the market.
The cuts are also scheduled to start from May, just as refineries ramp up in preparation for the increased demand of the summer months. Before the cuts, Rystad had estimated the crude oil market would be in deficit by about 1.4 million bpd between May and August.
“Today’s move, like the October cut, can be read as another clear signal that Saudi Arabia and its OPEC partners will seek to short circuit further macro sell-offs and that Jay (Jerome) Powell is not the only central banker that matters,” RBC Capital Markets analyst Helima Croft told Reuters.
“The bottom line is Washington and Riyadh simply have different price targets for their key policy initiatives.”
The White House said yesterday that the OPEC+ decision was ill-advised, adding that the U.S. would work with producers and consumers on gas prices.
The big concern is that higher oil prices will further stoke inflation, complicating the task of central bankers bent on taming it.
“The announcement, strangely, came ahead of the actual OPEC meeting scheduled … and throws another spanner in the works for central bankers who may have just started to unclench their jaws a little with regards to the inflation situation,” Benjamin Picton, a senior macro strategist at Rabobank in Sydney, told Reuters.
“The durability of declining headline inflation must now be seriously questioned if oil producing countries are determined to ensure that oil prices have already bottomed.”
Odds that the United States Federal Reserve will raise rates at its May meeting were up to 63 per cent this morning from 56 per cent on Friday, according to Bloomberg.
Markets still expect a rate cut by year end but that could change if oil prices reignite inflation.
Nigel Green, chief executive of investing firm deVere Group, said OPEC+’s “dramatic cut” will only add to global inflationary pressures by pushing up the cost of production and transportation and leading to higher inflation expectations.
“There’s real concern that the surprise decision announced by Saudi Arabia for OPEC+ will prompt central banks to maintain interest rates higher for longer, due to the inflationary impact, which will hinder economic growth,” he said.