Unexpected cuts to crude output by oil producers have caused oil prices to soar, raising fresh inflation concerns in global markets.
West Texas Intermediate (WTI) rose by up to 8% in early trading and reached over $79 per barrel at 7 am, while Brent crude increased by almost 5% and approached $84. OPEC’s decision to reduce production by more than one million barrels per day surprised the markets, with Saudi Arabia alone promising to cut 500,000 daily barrels. Oil-rich countries like Russia joined the oil cartel to drive demand in a stuttering global economy.
The surge in oil prices, following its worst first-quarter drop since 2020, presents a renewed risk of inflation, putting further pressure on central banks such as the US Federal Reserve to raise rates. This decision is likely to be met with disapproval from the White House.
Analysts warn that higher oil prices could cause inflation and compel the Fed to increase rates, which economists expected to remain unchanged in the upcoming meeting. The proactive approach of OPEC is aimed at ripping oil prices from the grip of macro sentiment.
Oil prices in Asia surged almost 8% on Monday morning after Saudi-led oil producers unexpectedly announced a production cut. The OPEC cartel of oil-exporting countries stated on Sunday that they would reduce output by over 1 million barrels per day to boost crude prices in the face of the stuttering global economy.
Trading in Asia saw Brent Crude rise to $86, after closing at $79.89 on Friday, risking further inflation and hurting drivers at the pump.
The decision could also lead to a clash between the Kingdom and US President Joe Biden, who threatened the Saudis with “consequences” after previous cuts in October. The reduction in output may help Russia battle its slump in oil and gas revenues as it tries to fund President Vladimir Putin’s war with Ukraine. The Biden administration criticized the move, citing market uncertainty.
Dan Pickering, co-founder of Houston-based investment firm Pickering Energy Partners, stated that the cuts could significantly firm prices and push them up by $10, which would take Brent crude towards $90. Lower oil output drives up prices because there is less crude in the market, meaning buyers have to outbid each other to secure a shipment.
