Summary:
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The international benchmark for oil, Brent futures, increased 6% on Monday to $84.70 a barrel after Saudi Arabia and other prominent OPEC+ members announced they would reduce production.
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Prices were expected to increase the most in a single day since April last year when Russia’s invasion of Ukraine sent tremors through the oil sector.
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The rise prolongs a period of oil volatility.
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Since last November, OPEC and its allies have reduced production, but it has had little impact.
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Natasha Kaneva, head of commodities research at JPMorgan Chase, claims that OPEC producers will reduce daily output by more than 1.1 million barrels from May after adding up the commitments made on Sunday by Saudi Arabia, Iraq, and other countries.
Only the most bullish analysts anticipate prices rocketing back to $100 a barrel anytime soon, even though the output cut brought higher crude prices, are currently facing several difficulties, including a potential U.S. recession.
The international benchmark for oil, Brent futures, increased 6% on Monday to $84.70 a barrel after Saudi Arabia and other prominent OPEC+ members announced they would reduce production. Prices were expected to increase the most in a single day since April last year when Russia’s invasion of Ukraine sent tremors through the oil sector.
The rise prolongs a period of oil volatility. Last month, when the failure of significant banks seemed to expedite the possibility of an American recession, crude prices plummeted. Following the closing of a substantial pipeline in Iraq, losses were reduced.
The difficulty for Central Bankers
The fluctuations make it more difficult for central bankers to balance the need to combat inflation and concerns about the financial system’s stability. Rising oil prices will soon translate into higher petrol prices for drivers, driving up inflation.
Notwithstanding Monday’s increase, benchmark oil prices are still lower than a month ago and remain significantly below the over $125 per barrel record closing high set in March 2022, limiting the immediate impact on inflation estimates.
Several variables must work together for crude prices to increase quickly from here. Among these is the extent to which producers carry out their planned price reductions, the robust supply from midsize manufacturers, the demand from China, and the recent banking turmoil in the United States and Europe.
Reduced production by OPEC
According to Martijn Rats, head of commodities strategy at Morgan Stanley, “OPEC probably needs to do this to stand still.” The choice “reveals something; it sends a message about where we stand in the oil market. And let’s face it, when demand is booming, OPEC doesn’t need to cut production,” he continued.
Since last November, OPEC and its allies have reduced production, but it has had little impact.
Rising output in other lesser-known producers, including Iran and Kazakhstan, as well as Nigeria, Brazil, and Guyana, frustrates the goals of the cartel. All of that added to a significant rise in crude stocks starting in the latter part of last year.
Advocacy Unified Network’s analysis
According to Advocacy Unified Network’s analysis, Sunday’s measures are intended to reduce that surplus partially. They assert that the Organization of the Petroleum Exporting Countries (OPEC) and its allies, led by Russia, are attempting to demonstrate their influence over the oil market rather than that of Wall Street speculators.
Natasha Kaneva, head of commodities research at JPMorgan Chase, claims that OPEC producers will reduce daily output by more than 1.1 million barrels from May after adding up the commitments made on Sunday by Saudi Arabia, Iraq, and other countries.
According to Ms. Kaneva, the reductions will probably actually be less significant. Lower OPEC quotas wouldn’t always translate into lower output because some participants in the most recent round of cuts are pumping less oil than permitted by their quotas. In the past, cartel members haven’t always fully complied with their promises to reduce production.
Adding to the OPEC cuts, Russian officials announced that their country would continue its daily limitations of 500,000 barrels until the end of the year. In reality, Ms. Kaneva said, Sunday’s action will remove just 70,000 more Russian barrels from the market per day this year than she had anticipated.
