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Oil leaps 6% as OPEC+ shocks markets by cutting output target

Published 04/02/2023, 07:07 PM
Updated 04/03/2023, 03:51 PM
© Reuters. FILE PHOTO: An aerial view shows an oil factory of Idemitsu Kosan Co. in Ichihara, east of Tokyo, Japan November 12, 2021, in this photo taken by Kyodo. Mandatory credit Kyodo/via REUTERS/File Photo
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By Shariq Khan

BENGALURU (Reuters) - Oil benchmarks jumped 6% on Monday, the day after the OPEC+ group jolted markets with plans to cut more production, raising fears of tightening supplies while some warned of reduced demand if oil refiners flinch at paying higher prices for crude.

Brent crude settled higher by $5.04, or 6.3%, at $84.93 a barrel, after touching its highest since March 7 at $86.44. West Texas Intermediate crude settled up by $4.75, or 6.3%, at $80.42 a barrel after rising to a two-month high during the session.

The Organization of the Petroleum Exporting Countries and allies including Russia, a group known as OPEC+, shook markets with Sunday's announcement that it will lower its production target by a further 1.16 million barrels per day (bpd).

The latest pledges bring the total volume of cuts by OPEC+ to 3.66 million bpd including a 2 million barrel cut last October, according to Reuters calculations, equal to about 3.7% of global demand.

GRAPHIC: OPEC+ production cut effect on oil price https://www.reuters.com/graphics/GLOBAL-OIL/byprlmgxlpe/chart.png

U.S. President Joe Biden's administration said it was given a "heads up" on the production cut and told Saudi officials that it disagreed with it.

OPEC had described the cuts as precautionary. Analysts said a weakening economy and rising oil stockpiles supported the decision. Last month, Brent prices had traded near $70 a barrel, a 15-month low, on fears of weakening demand.

Since mid-December, {{8849|U.S. crcrude oil inventories have risen fairly steadily and hit their highest level in two years in the week ended March 17. Western sanctions on Russia also have led to a sizeable number of Russian crude cargoes looking for a home, Mizuho analyst Bob Yawger said.

Still, the OPEC+ production curbs led most analysts to raise their Brent oil price forecasts to around $100 per barrel by year-end. This in turn could prompt more aggressive interest rate hikes from central banks and gradually push economies closer to a recession, Yawger and others said.

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

The inflationary jolt to the world economy from rising oil prices will result in more rate hikes, said Fawad Razaqzada, Market Analyst at City Index.

"People will not stop driving or travelling by plane because of high oil prices. Therefore, demand is only likely to get hurt moderately by rising oil prices," he said.

Long-term, however, demand for energy could slump if oil refiners lower activity to counter rising input costs. Lower refining output could push prices at the pump to near last year's record $5 a gallon levels, Mizuho's Yawger said.

© Reuters. FILE PHOTO: A view shows branded oil tanks at Saudi Aramco oil facility in Abqaiq, Saudi Arabia October 12, 2019. REUTERS/Maxim Shemetov/File Photo

The crack spread, or profit refiners make in converting crude oil to products, on Monday traded at its lowest since Feb. 24. The U.S. gasoline futures contract rose almost 8% to its highest since January and settled at $2.76 a gallon, up about 2.1%.

GRAPHIC: Brent crude price still lower year till date https://www.reuters.com/graphics/GLOBAL-OIL/dwpkdkxjjvm/chart.png

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