OPEC surprises with further cuts to oil production amid demand fears
Oil markets could enjoy robust trading tomorrow morning after the world’s most influential energy cartel announced surprise cuts to production today.
OPEC and its allies including Russia, known as OPEC+, announced voluntary cuts to their production today, amounting to around 1.15m barrels per day.
This is on top of the 2m barrels per day cuts agreed last November, which will kick in from next month.
OPEC argued the move was aimed at supporting market stability following volatility across the financial sector.
“OPEC is taking pre-emptive steps in case of any possible demand reduction,” Amrita Sen, founder and director of Energy Aspects told Reuters.
The move is a shock development as the group had been expected to stick to current pledges when its ministerial panel meets virtually later tomorrow.
OPEC also remains plagued by production issues, with the cartel pumping 28.9m barrels per day (bpd) last month, according to the latest Reuters survey.
This was down 70,000 bpd from February, while output is more than 700,000 bpd below last September’s figures.
Oil prices have begun a slow journey to recovering prices as the dust starts to settle on last month’s banking crisis amid tightening supplies and US inflation data suggested price rises were slowing.
Brent Crude and WTI Crude recorded two straight weeks of gains, with prices settling 1.64 per cent and 1.75 per cent up at close of play on Friday.
While well below the levels recorded in last year’s rallies, Brent Crude is now trading at a robust $79.89 per barrel and WTI Crude at $75.67 per barrel ahead of the start of next week’s session.
This follows prices dropping sharply in early March – with Brent Crude plummeting from $86.18 per barrel to $72.77 per barrel over an 11 day decline.
The benchmarks hit their lowest levels since 2021 on March 20 in the wake of large bank failures, with the collapse of financial institutes Silicon Valley Bank and Signature, alongside the last-minute forced merger of UBS and Credit Suisse.
This spooked investors over the prospect of a recession, reducing demand expectations on the spot market.
A strong potential tailwind for oil prices is the latest datas from the US Personal Consumption Expenditure (PCE) index – the Federal Reserve’s preferred inflation gauge.
The index rose 0.3 per cent in February on a monthly basis, compared with a 0.6 per cent rise in January and an expectation of a 0.4 per cent rise in a poll from news agency Reuters.
Slowing inflation typically bolsters oil prices as it is seen by investors as an indication of less aggressive interest rate hikes from the Fed, lifting investor demand for risk assets such as commodities and equities.
Craig Erlam, senior markets analyst at OANDA remained hesitant, however, over the latest recovery in prices.
He said: “Oil prices are continuing to gradually recover but remain way off pre-banking mini-crisis levels. The prolonged economic scarring of the last month will likely slow the economy if not cause a recession and lower interest rate expectations are not enough to support oil prices in the short term.
“They continue to trade around the range lows from the months that preceded recent events and may struggle to reestablish themselves around those previous levels. The recovery may be a slow grind as confidence improves and we learn what the longer-term consequences are of what we’ve seen in the banking sector.”
Energy analysts Redburn noted that despite recent gains, prices were down five per cent month on month
“The risk the market is grappling is whether there will be negative consequences for demand which would loosen the supply-demand balance further,” Redburn said.