OPEC's surprise cuts lead to sharp increases in oil prices

OPEC's surprise announcement that it will reduce its daily oil production starting in May triggered an immediate price rise that reached as high as 8% during the day on Sunday. Experts were concerned that the barrel price could reach and even exceed $100 in 2023 as a result of the cuts and economic and financial uncertainty. The petroleum cartel justified that the initiative seeks to "stabilize the crude oil market" and avoid a repeat of the situation experienced in 2008, when the economic crisis caused the price to plummet from $140 to $35 in just six months.

The price of Brent crude closed Sunday with an increase of 5.07%, reaching $83.95 per barrel. West Texas Intermediate (WTI) futures climbed to $79.59 per barrel, up 5.17%.

Russia and Saudi Arabia lead OPEC cuts

Several OPEC members announced on Sunday that, starting next month and until the end of the year, the cartel's daily oil production will be reduced by more than one million barrels per day. The largest cuts will be made by Russia and Saudi Arabia, which will each reduce by 500,000 barrels per day. Other members of the organization will lower their daily pumping, albeit to a much more limited extent.

Russian Deputy Prime Minister Aleksander Novak was the first to announce, via a statement, the decision to reduce crude oil production, citing a "period of great volatility and unpredictability.” The Kremlin points to "the current banking crisis in the United States and Europe, global economic uncertainty and unpredictable and short-sighted energy policy decisions" as the source of this situation. Saudi Arabian Energy Minister Abdulaziz Bin Salman Al-Saud followed suit, stressing that "this is a precautionary measure aimed at supporting the stability of the oil market."

Experts warn

Speaking to CNBC, CMC Markets analyst Tina Heg noted that OPEC's cuts "may push oil prices towards the $100 mark again." Especially at a time when China has reopened its economy after COVID-19 lockdowns, coupled with "Russia's production cuts as a retaliatory measure against Western sanctions." Teng warned that another consequence of this initiative could reverse the decline in inflation, "which would complicate central banks' rate decisions.”

Also projecting prices above $100 is Amrita Sem, founder of Energy Aspects. According to the analyst, the main problem is that, this time, "most of the OPEC cuts will correspond to countries that are producing at the level of the quotas or above them, which implies that a larger portion of the announced cuts will be translated into actual reductions in supply than in October 2022.”

Analysts, including Goldman Sachs, stressed that, unlike the October 2022 cuts, global oil demand is currently on the rise, spurred by the reopening of the Chinese economy. According to its forecasts, Brent crude is expected to reach $95 per barrel in December of this year.