Brent and WTI extend gains after producers move to balance market

Oil prices extended their gains yesterday following the surprise output cut by Opec+ producers that will collectively take more than 1.16 million barrels per day off the market.

Brent, the benchmark for two thirds of the world’s oil, was trading 1.06 per cent higher at $85.83 a barrel at 5.20pm UAE time while West Texas Intermediate, the gauge that tracks US crude, was up 1.34 per cent at $81.50 a barrel.

The two leading crude oil futures contracts ended trading up more than 6 per cent each on Monday, with Brent settling at $84.93 and WTI at $80.42.

The producers’ group, which slashed its collective output by two million bpd last year, was expected to stick to the agreed production levels at its meeting on Monday. However, Saudi

Arabia, the UAE, Iraq, Kuwait, Algeria, Oman, Kazakhstan and Gabon announced a collective cut of more than one million bpd a day from May until the end of this year.

Russia said the 500,000 bpd cut it was making from March to June would continue until the end of the year. This takes the output cut to more than 1.66 million bpd by the end of this year, in addition to the two million bpd production cut put in effect at the end of last year.

“Voluntary production cuts are nothing new but the scale of this round is unprecedented. Because they are voluntary, these nine Opec+ group members have more flexibility to reverse the cuts if conditions warrant it,” said UBS strategist Giovanni Staunovo last week.

The output cuts “should not come as a shock, given the recent sharp fall in oil prices”, said Hasnain Malik, head of equity research at Tellimer. “The last of the Russia-Ukraine War premium was erased when Brent dropped to $70 per barrel on March 20, a 15-month low … perhaps the only surprise is the cut was announced after oil prices [Brent] had rallied back up to $80 by the end of March,” he said.

After nearly hitting $140 a barrel in March of last year, oil prices plunged to a more than 12-month low last month owing to a banking crisis in the US that had spread to Switzerland and led to the collapse of four lenders, setting off a broad sell-off in financial markets and raising the probability of a global recession. The output cuts come on the heels of growing concerns over the recovery of oil demand following the banking sector turmoil.

It is “possible the surprise cut was aimed to clear the build-up of short futures and options positions in recent weeks”, said Mr Staunovo.

Moreover, Opec+ “may be seeking to tackle concerns about underinvestment after the Biden administration failed to follow through on its earlier pledge to refill the US strategic petroleum reserve if WTI fell into the production cost curve of US shale producers”, he said.

The decision of Opec+ producers “clearly caught traders off guard”, said Craig Erlam, senior market analyst at Oanda. “This isn’t the first pre-emptive cut that has caused uproar and the group will point to that as evidence that it’s acting on supply and demand dynamics, rather than just price,” he said. “From a market perspective, what it does is reinforce the floor in prices as we know the group won’t hesitate to intervene again.”

The International Energy Agency expects global oil demand to rise “sharply” this year on the back of pent-up Chinese demand and a rebound in air traffic.

The reopening of China, the world’s second largest economy and biggest importer of crude, could boost the world’s gross domestic product by about 1 per cent in 2023 and lead to a rally in oil prices, according to Goldman Sachs.

The US investment bank, which recently reduced its oil price forecasts for this year, citing growing crude supplies and lower demand, now expects

Brent to trade at $95 a barrel by the end of this year, from a previous estimate of $90, and at $100 next year, compared with a previous forecast of $97.

Goldman Sachs expects a compliance rate of about 90 per cent for the announced cut, as the countries that announced an additional cut “have a strong compliance track record” and had complied with about 90 per cent of October’s cut by January, it said.

“Oil prices are very likely to remain strong, although a retracement is certainly due, and we could see some profit-taking on the back of poor economic data,” said Naeem Aslam, chief investment officer at Zaye Capital Markets.

“An economic data set that paints a miserable picture for the global economy would make traders think again about strong oil demand, especially in China, as the country is really busy fully opening up its economy.”

What the cut does is reinforce the floor in prices as we know the group won’t hesitate to intervene again

CRAIG ERLAM

Senior market analyst at Oanda