Brent and WTI crude oil prices jumped 5% to $84/b and $80/b on Monday morning, as OPEC and its allies led by Russia announced a surprising output cut of 1.657 million barrels per day to stabilize the oil market.
On Sunday night, the surprising output cut by OPEC+ producers hit hard the short sellers on the crude oil contracts, with the price of Brent and WTI opening the session up as much as 8% to $85/b and $81.50/b respectively amid short-covering trades, before retreating during the day at the current gains of 5%.
Brent crude, Daily chart
OPEC+ decided to cut further by taking some proactive steps in case of any recession-driven petroleum demand reductions, especially after the recent sharp losses in oil prices in mid-March on the back of the banking crisis.
Investors have been surprised by the fresh cuts since the decision was made outside OPEC’s regular monthly meetings, the next of which is taking place later Monday.
The oil cartel announced it was voluntarily slashing output by 1.16 million barrels per day from May to the end of 2023, which would be its most significant cut since the start of the COVID-19 pandemic, while Russia also decided to cut oil production by 500k barrels per day for the same period.
Looking into the OPEC group, the de facto leader Saudi Arabia has pledged to cut by 500k bpd, followed by other member’s cuts such as Iraq’s 221k, UAE’s 114k, and Kuwait’s 128k, amongst other smaller cutbacks from Algeria, Oman, Gabon, and Kazakhstan.
With the new cut, the total output reduction amount from OPEC+ will come in at 3.66 million barrels daily or 3.7% of global oil demand.
The selected involvement of 9 producing members in the fresh output cut deal suggests that loyalty to cuts may be stronger than has been the case in the past.
In October 2022, OPEC announced its decision to cut output by two million barrels per day as the momentum of global oil demand was down due to Chinese Covid-led mobility restrictions.
As was expected, the Biden administration criticized the move, saying it was not the time to cut production, with the spokesperson for the National Security Council saying that the cuts are not advisable at this moment given market uncertainty.
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