Oil price jumps 8% as OPEC announces surprise million-barrel production cut

Oil prices rose on Monday after Saudi Arabia and other OPEC+ producers announced surprise cuts in their planned monthly crude output.

The price of a barrel of West Texas Intermediate oil rose eight percent to $80.67 a barrel on news that the Organization of the Petroleum Exporting Countries would cut production by about 1.16 million barrels per day.

Russian energy spokesman Dmitry Peskov said the move was designed to “keep the price of crude oil and oil products at a certain level.” Officially, Russia is not a member of the Saudi-led OPEC, but has cooperated with the cartel in recent years, a partnership dubbed OPEC+.

Goldman Sachs raised its forecast for the European oil benchmark known as Brent to $ 95 US barrel by the end of the year and to $ 100 for 2024 after the news of OPEC, which was announced on Sunday, a day before the virtual meeting of officials from OPEC + .

“I think the alliance wants to make sure [oil] the surplus will not extend beyond the second half of 2023, knowing that most of the economic weakness will come,” said Samy Chaar, chief economist at Swiss Bank Lombard Odier.

Oil news rippled through the stock market as shares in US oil giants Chevron and Exxon both jumped up by more than four percent in pre-market trading.

Bad news for the inflation war

The oil cartel’s move has weighed on interest rate expectations, as moves to increase oil prices will not help central banks around the world, which are trying to curb inflation.

OPEC’s move has “raised fears that inflation will become a more durable problem for central banks,” ING FX strategist Francesco Pesole said in a comment.

Central banks have raised interest rates rapidly in the past year in an effort to control rampant inflation.

“If output cuts succeed in pushing global prices higher, global progress to reduce inflation could slow, and central banks may be forced to take a more hawkish approach,” said Karl Schamotta, strategist with Corpay in Toronto.

Trading in investments known as swaps, which are bets on the direction of central bank rates, shows the probability of another rate hike by the US central bank next month is 60 percent. On Friday, he was only 50 percent.