Oil prices jumped on Monday and Goldman Sachs raised its year-end forecast for Brent crude after Opec+ nations announced unexpected production cuts of more than 1mn barrels a day in the face of weaker demand.
International oil benchmark Brent crude rose as much as 8.4 per cent to a high of $86.44 a barrel in early Asian trading on Monday. US marker West Texas Intermediate climbed as much as 8 per cent to $81.69 a barrel.
Brent later pared gains to be up 6.2 per cent — still the highest one-day jump in a year — while WTI was up 6.3 per cent. The S&P oil and gas exploration and production index rose 3.5 per cent. ExxonMobil gained 5.3 per cent and Chevron 3.9 per cent.
Elevated oil prices may muddy the downwards inflation and interest rate path investors had envisioned for the Federal Reserve. Data released last week showed that the core personal consumption expenditures index — the Fed’s preferred measure of inflation — softened in February. Investors are pricing in a better than even chance of a 0.25 percentage point rise at the central bank’s next meeting in May.
However, since US inflation is largely service-based, and it is less reliant on oil imports, the effects of the production cuts could be moderated.
“For the US it is not a particularly big concern, but it will be interesting to see if it is sustained and retail gas prices rise, which would matter for headline inflation expectations,” said Veronica Clarke, an economist at Citigroup. “Those have been coming down so it would be more worrisome if that turns around.”
Complicating the picture on Monday was ISM data showing that US manufacturing activity had fallen to its lowest level in almost three years. That helped push the yield on 10-year US Treasuries down 0.08 percentage points to 3.41 per cent.
Broader equity markets were mixed, with the blue-chip S&P 500 down 0.1 per cent and the tech-heavy Nasdaq down 0.9 per cent.
The sharp gains for crude and energy companies came after Saudi Arabia announced it would implement a “voluntary cut” of slightly less than 5 per cent of its output, or 500,000 barrels a day, “in co-ordination with some other Opec and non-Opec countries”.
Russia, a member of Opec+, also said it would extend its existing production cut of 500,000 barrels a day until the end of the year.
Shares in European energy companies jumped on the news, with the Stoxx Europe 600 oil and gas index closing up 4.1 per cent while the FTSE 100, which has a heavier weighting to energy companies than most indices, rose 0.5 per cent.
UK-based oil and gas company Harbour Energy climbed 5.7 per cent to the top of the Euro index. Oil majors TotalEnergies and BP rose 5.9 and 4.3 per cent respectively.
Rising oil prices may also complicate the European Central Bank’s attempts to maintain price stability — the continent is more reliant on oil imports than the US.
“It was a difficult juggling act already, trying to avoid a financial crisis, beat inflation and not cause a slowdown,” said Neil Birrell, chief investment officer at Premier Miton. “That’s just become much more difficult with the reduction in production, which will lead to higher prices and inflation. It’s another headache for them.”
The cut to production comes amid heightened uncertainty over the outlook for global oil demand after the US publicly ruled out new crude purchases to replenish its strategic stockpile — despite previously pledging to Saudi Arabia that it would buy more if its reserves fell.
In response to the cuts, economists at Goldman Sachs raised the bank’s year-end price forecast for Brent crude by $5 to $95 a barrel on the back of an expected daily decrease in output of about 1.1mn barrels a day. The bank also boosted its forecast for the end of 2024 to $100 a barrel.
“Opec+ has very significant pricing power relative to the past given its elevated market share, inelastic non-Opec supply and inelastic demand,” said Daan Struyven, senior energy economist at Goldman Sachs.
Struyven said the move reflected a “precautionary production cut” similar to that made by the oil cartel in October 2022, but added that “unlike then, the momentum for global oil demand is up not down with a strong China recovery”.
Last month, the International Energy Agency said a “resurgent China” would help push global oil demand up by 3.2mn barrels a day between the first and fourth quarters, “the largest relative in-year increase since 2010”.
Elsewhere in Europe, there was a mixed picture in equity markets, with the region-wide Stoxx 600 down 0.1 per cent, the German Dax down 0.3 per cent and the French Cac 40 up 0.3 per cent.
Equities were mixed in Asian trading, with Japan’s benchmark Topix index up 0.7 per cent and Hong Kong’s Hang Seng index flat. China’s CSI 300 rose 1 per cent.
