Oil market surges on shock output cuts

World oil prices soared Monday after several top producers led by Saudi Arabia sprang surprise output cuts despite already angering the United States with a similar move last year.

Crude futures surged almost eight percent at one stage, a day after multiple members of the OPEC+ exporters’ alliance unexpectedly slashed production by a total of more than one million barrels per day.

The shock reduction will start in May and last until the end of the year, with OPEC+ saying Monday it involves Algeria, Gabon, Iraq, Kazakhstan, Kuwait, Oman, Saudi Arabia and the United Arab Emirates.

It came on top of a decision from Russia — also an OPEC+ member — to extend a cut of 500,000 barrels per day.

The oil cartel had already angered Washington in October by slashing production by two million barrels per day.

At the time, the White House accused OPEC+ of “aligning with Russia”, saying the cuts would boost Moscow’s revenue and undermine Western sanctions imposed over its invasion of Ukraine.

Russia’s war on Ukraine sent energy prices soaring last year, fuelling high inflation across the world, but crude prices have fallen since then. OPEC+ said in a statement on Monday that Sunday’s move was a “precautionary measure aimed at supporting the stability of the oil market”.

The Kremlin also defended the decision, saying it was “in the interests of global energy markets for world oil prices to remain at a good level”.

“Whether other countries are happy with this or not is their business,” Kremlin spokesman Dmitry Peskov told reporters.

– ‘Revive geopolitical tensions’ – Sunday’s decision is “in reality” aimed at pushing prices higher but could have a political impact too, senior analyst Ipek Ozkardeskaya at Swissquote Bank said.

The drop in global oil supplies is “enough to revive geopolitical tensions with the United States, which already called the decision ill-advised, and more than enough to spur the inflation worries across the world”, she said.

The news sparked bumper gains for European energy companies and lifted London and Paris stock markets, although Frankfurt dipped. On Wall Street, shares opened higher too.

Shares in US oil giant ExxonMobil, Britain’s BP and Shell rose more than five percent while France’s TotalEnergies was up over six percent.

Oil giants enjoyed record profits last year as crude prices soared.

– Rates higher for longer? – The weekend development also fanned concerns over a fresh spike in consumer prices that could put pressure on central banks to push interest rates even higher — and dent the global economy.

Central banks have been hiking rates in efforts to tame high inflation.

“There’s real concern that the surprise decision… will prompt central banks to maintain interest rates higher for longer, due to the inflationary impact, which will hinder economic growth,” said Nigel Green, head of financial consultancy deVere Group.

Global equities had been buoyed Friday after data highlighted easing inflation in the eurozone and the United States.

Green said the oil price rises “can be expected to increase the cost of production and transportation, reduce consumers’ purchasing power, disrupt supply chains, and lead to higher inflation expectations.”

Crude prices have come down over the past year as concerns about a possible recession caused by higher borrowing costs have offset supply worries sparked by sanctions on Russia over its war on Ukraine.

“The production cut… clearly shows OPEC was not happy with the movement in the oil price which had fallen over recent months,” said National Australia Bank‘s Tapas Strickland