Business Maverick

Business Maverick

Oil holds biggest gain in a year after shock supply cut by OPEC+

Oil holds biggest gain in a year after shock supply cut by OPEC+
US President Joe Biden speaks during a news conference in the State Dining Room of the White House in Washington, DC, US, on Wednesday, 9 November 2022. Biden has downplayed yesterday's sharp rise in the price of crude oil.

Oil built on the largest gain in a year after OPEC+ delivered an unexpected and substantial production cut that will tighten the global market.

West Texas Intermediate advanced toward $81 a barrel after rallying by more than 6% on Monday. The surprise reduction in supply by the Organisation of Petroleum Exporting Countries and its allies blindsided the global crude market, prompting many banks to jack up their price forecasts.

There’s concern that the move by OPEC+ will inject fresh vigour into inflationary pressures, with US Treasury Secretary Janet Yellen criticising the group’s decision as “unconstructive.” Still, President Joe Biden downplayed the concerns, saying late on Monday its impact is likely not “as bad as you think”.

Crude has soared by about a quarter since collapsing in mid-March to its lowest level since late 2021. The rebound was driven initially by expectations Chinese demand would pick up as Covid Zero abruptly ended, and by interruptions to supplies from Iraq. It was then supercharged by the OPEC+ decision to remove more than 1 million barrels of daily output from the market.

The producers’ group began to see the need for a change in policy on March 20, according to people familiar with the matter, when global benchmark Brent sank to a 15-month low. The Saudis reflected that short sellers were due a reminder of the pain OPEC+ can still inflict on them, the people said.

“The supply cuts have thrown short sellers under the bus,” said Jessica Amir, a market strategist at Saxo Capital Markets in Sydney. Although US shale drillers might see this as an opportunity to boost output, it’s unlikely that production expansion will be able to make up for the cutbacks, she said.

Many on Wall Street including Goldman Sachs Group upgraded their price forecasts in the wake of the decision. Still, Morgan Stanley bucked the trend, noting China’s demand growth has lagged behind expectations and lowering its outlook. Citigroup also rebuffed talk of a swift rally back to $100 a barrel.

“This move sends a strong message to the market, with OPEC drawing a line in the sand regarding oil prices,” ANZ Group Holdings Ltd. said in a note, adding that the supply reduction would quickly push the market into a deficit. BM/DM

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