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Friday, June 21, 2024

Oil Bulls Rejoice as OPEC Shocks the Market with Output Cut – Bloomberg

Oil Bulls Rejoice as OPEC Shocks the Market with Output Cut.

Oil prices surged on Friday after OPEC and its allies surprised the market with a decision to cut production by 1.5 million barrels per day in April, amid signs of weakening demand due to the coronavirus pandemic.

The move, which defied expectations of a modest increase or no change in output, sent Brent crude futures up by more than 5% to above $70 a barrel, the highest level since January 2020. WTI crude futures also jumped by more than 4% to above $66 a barrel, the highest since April 2019.

OPEC and its allies, known as OPEC+, said they agreed to extend most of the existing cuts into April, with only Russia and Kazakhstan allowed to raise output by a combined 150,000 barrels per day. Saudi Arabia, the de facto leader of OPEC, also said it would extend its voluntary cut of 1 million barrels per day for another month.

The group said the decision was based on “the ongoing positive contributions of the Declaration of Cooperation (DoC) in supporting a rebalancing of the global oil market” and “the recent market developments and the resurgence of COVID-19 infections across the globe”.

The unexpected output cut came as a shock to many analysts and traders who had anticipated that OPEC+ would ease some of the curbs as global oil demand recovers from the pandemic-induced slump. However, OPEC+ said it was mindful of the uncertainties and risks facing the market, especially from new virus variants and lockdown measures.

The group also said it would continue to monitor market conditions and hold monthly meetings to adjust output levels accordingly. It also reaffirmed its commitment to achieving oil market stability in the interest of producers, consumers, and the global economy.

The bullish move by OPEC+ boosted market sentiment and lifted oil prices to levels not seen since before the pandemic. However, some analysts warned that the tight supply could backfire if it leads to a surge in US shale production or a loss of market share to other producers.

Moreover, some demand warnings flashed in recent days, as several countries reported a rise in COVID-19 cases and imposed new restrictions. The International Energy Agency (IEA) also lowered its global oil demand forecast for 2023 by 200,000 barrels per day, citing slower-than-expected vaccine rollouts and economic recovery.

OPEC itself raised its world oil demand growth forecast for 2023 by 100,000 barrels per day, to 2.3 million barrels per day, but acknowledged that “the pace of recovery remains uncertain”. The group said it expects oil demand to return to pre-pandemic levels in 2023, but warned that “the energy transition will continue to pose challenges for producers”.

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