Oil extends gains ahead after Opec+ cuts

London — Oil prices rose on Tuesday after Opec+ plans to cut more production jolted markets the previous day, with investors’ attention shifting to demand trends and the impact of higher prices on the global economy.

Brent crude futures were up 43c, or 0.5%, to $85.36 a barrel by 9.25am. West Texas Intermediate was trading at $80.89/bbl, up 47c, or 0.6%.

Both benchmarks jumped more than 6% on Monday after Opec and allies including Russia, collectively known as Opec+, rocked markets with Sunday’s announcement of voluntary production cuts of 1.66-million barrels a day from May until the end of 2023.

The latest pledges bring the total volume of cuts by Opec+ to 3.66-million bbl/day, including 2-million bbl in October, equal to about 3.7% of global demand.

“Oil prices can easily rise above $100 a barrel,” said Fereidun Fesharaki of consultancy FGE. “Our forward balances show a very steep draw in inventories through end 2023.”

The cuts led most analysts to raise their Brent oil price forecasts to about $100/bbl by year-end. Goldman Sachs lifted its forecast for Brent to $95 by the end of the year, and to $100 for 2024.

“The motivation behind the cut ... is not clear from the very limited public statements that have been made,” said Callum Macpherson, head of commodities at Investec.

“It may be due to concerns about the spill over of recent equity market volatility into oil prices or because members perceive a weakness in the physical market that is not apparent to the wider market,” he added.

The news added to investor concerns about higher costs for businesses and consumers, raising fears that an inflationary jolt to the world economy from rising oil prices will result in more rate hikes.

Market watchers have been trying to gauge how much longer the Federal Reserve may need to keep raising interest rates to cool inflation, and whether the US economy may be headed for recession.

US manufacturing activity slumped to the lowest level in nearly three years in March and could decline further on tighter credit and higher borrowing costs. 

Reuters