SINGAPORE/SEOUL/LONDON β Surprise new cuts to the OPEC+ groupβs output targets could push oil prices towards $100 a barrel, setting the scene for another clash with the West grappling with higher interest rates, analysts and traders said on Monday.
The decision signals unity within OPEC+ despite Washingtonβs pressure on its Gulf allies to weaken their ties with Moscow, while also undermining the Westβs efforts to limit RussiaβsΒ oilΒ income.
OilΒ prices jumped over 6% on Monday after the Organization of the Petroleum Ex porting Countries and their allies including Russia announced on Sunday further production targetΒ cutsΒ of about 1.16 million barrels per day (bpd) from May through the rest of the year.
The pledges will bring the total volume ofΒ cutsΒ by the group known as OPEC+ since November to 3.66 million bpd according to Reuters calculations, equal to 3.7% of global demand.
OPEC+ had been expected to hold outputΒ steady this year, having already cut by 2 million bpd in November 2022.
Saudi Arabia said its voluntary outputΒ cut was a precautionary measure aimed at supporting market stability.
Russian Deputy Prime Minister Alexander Novak said interference with market dynamics was one of the reasons behind theΒ cuts.
The International Energy Agency said theΒ cutsΒ risk exacerbating a strained market and pushing upΒ oilΒ prices amid inflationary pressures.
βThe newΒ cutsΒ are underpinning that the OPEC+ group is intact and that Russia is still an integral and important part of the group,β SEB analyst Bjarne Schieldrop said.
Rystad Energy said it believed theΒ cutsΒ will add to tightness in theΒ oilΒ market and lift prices above $100 a barrel for the rest of year, possibly taking Brent as high as $110 this summer.
UBS also expects Brent to reach $100 by June, while Goldman Sachs raised its December forecast by $5 to $95.
Goldman said strategic petroleum reserve (SPR) releases in the United States and in France, due to ongoing strikes, as well as Washingtonβs refusal to refill its SPR in the 2023 fiscal year, may have prompted the OPEC+ action.
Higher prices will likely spell more income for Moscow to fund its expensive war in Ukraine, upsetting Saudi-US relations further, Schieldrop said.
βThe US administration may also argue that higherΒ oilΒ prices will counter its efforts toΒ putΒ out the inflation fire,β he added.
While the higherΒ oilΒ prices will spell bad news for the European Central Bank as it tries to bring down inflation, it is unlikely to fundamentally alter the policy outlook for now.
An official at a South Korean refiner said the cut was βbad newsβ forΒ oilΒ buyers and OPEC was seeking to βprotect their profitβ against concerns of a global economic slowdown.
The supply cut would drive up prices just as weakening economies depress fuel demand and prices, squeezing refinersβ profits, the South Korean refining official and a Chinese trader said.
Both declined to be identified as they were not authoriZed to speak to media.
Tighter OPEC+ supply will also be negative for Japan as it may further boost inflation and weaken its economy, said Takayuki Honma, chief economist at Sumitomo Corporation Global Research.
βProducing countries apparently want to seeΒ oilΒ prices rise to $90-$100/bbl, but higherΒ oilΒ prices also mean higher risk of economic downturn and sluggish demand,β he added.
Purchases by China, the worldβs top crude importer, are however expected to hit a record in 2023 as it recovers from the COVID-19 pandemic, while consumption from No.3 importer India remains robust, traders said.
With higher prices and less supply of Middle East sour crude, China and India may be pushed to buy more RussianΒ oil, boosting revenue for Moscow, said the Indian refining official, who declined to be named as he was not authorized to speak to media.
The rise in Brent prices could push Urals and other RussianΒ oilΒ products to levels above the caps set by the Group of Seven Nations (G7) aimed at curbing MoscowβsΒ oilΒ revenue, he said.
ALTERNATIVES
Refiners in Japan and South Korea said they are not considering taking Russian barrels due to geopolitical concerns and may look for alternative supply from Africa and Latin America.
βJapan could seek more supply from the United States, but bringing the USΒ oilΒ through the Panama Canal is expensive,β Sumitomoβs Honma said.
Traders are also watching for a response from the US, which called OPEC+βs move inadvisable.
βIn essence, the purpose of this massive surprise production cut is mainly to regain market pricing power,β the Chinese trader said. β Reuters
