Oil prices rose on Monday, a day after OPEC members announced production cuts “aimed at supporting stability in the oil market.”
In early trade, Brent crude, the international benchmark, rose more than 6 percent to around $85 a barrel. West Texas Intermediate crude, the US benchmark, rose by a similar amount to trade above $80 a barrel.
The surprising messages signaled a potential new threat to global efforts to curb inflation and a challenge to the Biden administration, which has pushed for lower gas prices. In particular, production cuts could further exacerbate strained relations between the US and Saudi Arabia, OPEC’s de facto leader. Last year, President Biden made a special appeal to Saudi Crown Prince Mohammed bin Salman to increase oil production, just to have OPEC trim its output at the next meeting.
European stocks were mixed on Monday, with the S&P 500 opening slightly higher.
Saudi Arabia said it will cut output by 500,000 barrels a day starting next month. Combined with cuts announced by several other OPEC producers, the output reduction will be over a million barrels a day, or about 1 percent of global oil supplies.
Analysts said the move showed once again that Saudi Arabia and its oil minister, Prince Abdulaziz bin Salman, are determined to be proactive in keeping prices high, perhaps in the $90 a barrel range.
Frequently asked questions about inflation
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What is inflation? Inflation is one loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual change in prices of everyday goods and services such as food, furniture, clothing, transport and toys.
What causes inflation? It may be the result of increasing consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain issues.
Is inflation bad? It depends on the circumstances. Rapid price increases create problems, but moderate price increases can higher salaries and job growth.
Can inflation affect the stock market? Rapid inflation usually spells trouble for stocks. Financial assets in general have historically fared poorly during inflationary boomswhile tangible assets such as houses have held their value better.
“This is a new Saudi style of unpredictable maneuvering,” said Karen Young, senior fellow at Columbia University’s Center on Global Energy Policy. In recent days, Saudi oil officials had signaled that current production levels would be maintained until the end of the year.
However, it may prove difficult to raise prices if demand for oil falls. The shock from the production cuts “may be followed by the realization that the market is much weaker than people think,” wrote Edward Morse, head of commodities at Citigroup.
Uncertainty still prevails over the global economy. It is not clear how quickly China, the biggest oil importer and Saudi Arabia’s most important customer, will recover from its “zero Covid” lockdowns. Also difficult to assess is the extent of the damage that could be caused to overall oil demand by the recent turmoil in the banking sector. And higher prices will encourage more investment and production from other producers, such as shale oil drillers in the United States.
The Saudis, who lead the OPEC cartel, are signaling that today they prefer to act rather than wait and see how these trends play out, some analysts said.
“This is probably not their last production move of the year,” Mr. Morse.
OPEC Plus, which consists of OPEC plus Russia and a few others, produces about half of the world’s oil. The group had not been scheduled to hold a formal meeting of oil ministers until June, but the Saudis apparently decided action was needed. Prices have been weak recently, although they recovered somewhat in recent days as the banking woes appeared to ease. A dispute between Iraq and Kurdistan had recently disrupted some oil supplies, but one potential settlement was announced over the weekend.
The sight of prices falling towards $70 a barrel in mid-March was probably worrying for the Saudis and, analysts say, they may have decided to act before more bad news drove markets down further. Saudi Arabia needs high oil revenues to support ambitious development programs aimed at diversifying the kingdom’s economy away from oil.
Some analysts say the Saudis had no choice but to act.
“This move by OPEC Plus looks to restore its credibility as a proactive preventive force,” said Gary Ross, chief executive of Black Gold Investors, a trading firm.
What is clear is that the Saudis are likely to take actions they decide are in their interests even if their decisions irritate the Biden administration and complicate the Fed’s efforts to ease inflation. Indeed, after Sunday’s announcement, a spokeswoman for the US National Security Council said “we do not believe that cuts are advisable” due to market uncertainty.
“It has been clear that Saudi Arabia is prepared to endure increased friction in the bilateral relationship” with Washington, Helima Croft, an analyst at RBC Capital Markets, wrote in a note to clients.
Croft said the Saudis now see Washington as “just one of several partners” rather than their most important ally, as in the past.
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