The Opec+ alliance of 23 oil producers has agreed to stick to oil output cuts after some of its members moved to voluntarily reduce more than one million barrels per day of production collectively in a surprise move ahead of their meeting.
The members "reaffirmed their commitment to the DoC [declaration of co-operation] which extends to the end of 2023 as decided at the 33rd Opec and non-Opec Ministerial Meeting on 5th of October 2022, and urged all participating countries to achieve full conformity and adhere to the compensation mechanism", the group said in a statement after its online meeting on Monday.
Opec+ will continue to review the market dynamics and will meet again on June 4, the statement said.
The announcement comes after Opec+ members Saudi Arabia, the UAE, Iraq, Kuwait, Oman and Algeria said on Sunday evening that they will implement voluntary oil production cuts of 1.16 million bpd from May until the end of 2023.
The precautionary measure is aimed at supporting the stability of the oil market, they said.
In October, the Opec+ alliance, led by Saudi Arabia and Russia, slashed its collective output by 2 million bpd in a bid to support sagging oil prices amid weaker global economic outlook.
Russia has also said the 500,000 bpd cut it is implementing from March to June would continue until the end of the year.
The move takes the total output cut to more than 1.66 million bpd.
The latest pledge of output cuts pushes total volume of production caps by the Opec+ members to about 3.66 million bpd, which accounts for roughly 3.6 per cent of Opec’s 101.9 million bpd estimated world oil demand this year.
The Opec+ move "has the potential to push the market into a deficit in the second quarter, versus earlier expectations of a surplus”, said Vandana Hari, founder of Vanda Insights in Singapore.
The announcement about the voluntary cuts came as a surprise for the market, which was broadly expecting the group to continue rolling over production cuts and maintain its wait and see policy.
Both Brent, the benchmark for two thirds of the world’s oil, and West Texas Intermediate, the gauge that tracks US crude, jumped more than 6 per cent on Monday morning.
Brent was up 5.67 per cent at $84.37 a barrel at 3.12pm UAE time, while WTI was trading 5.89 per cent higher at $80.13 a barrel.
"Production cuts announced by Opec+ caught the market off guard to start the week and provided a boon to the oil price," Tim Waterer, chief market analyst at Kohle Capital Markets, said.
"One gets the feeling that the Opec+ members were not entirely comfortable seeing the [prices] languishing below the $70 level in recent times."
Oil prices are rallying from the one-year low of $72.77 reached last month due to a banking crisis in the US that spread to Switzerland, leading to the collapse of four lenders and triggering a broad sell-off in financial markets.
Saudi Arabia, the world’s biggest oil exporter and Opec's largest producer, said it would cut its output by 500,000 bpd as a “precautionary measure”.
The UAE will cut its output by 144,000 bpd, “to ensure market balance and ... in alignment” with other Opec+ members, UAE Minister of Energy and Infrastructure Suhail Al Mazrouei said.
Iraq's oil ministry also announced an output cut of 211,000 bpd to “face the challenges facing the global oil market, to strike a balance between supply and demand and market stability”.
Kuwait will cut oil production by 128,000 bpd and Algeria will implement a voluntary cut of 48,000 bpd, in co-ordination with Opec+ producers, its Ministry of Energy and Mines said on Sunday.
Kazakhstan's Energy Ministry also said it will voluntarily cut its oil output by 78,000 bpd day, while Oman committed to reduce production by 40,000 bpd.
"Opec+ has very significant pricing power relative to the past given its elevated market share, inelastic non-Opec supply, and inelastic demand," Goldman Sachs analysts said in a note.
The group's surprise cut is "consistent with the new Opec+ doctrine to act pre-emptively because they can, without significant losses in market share", they said.
Goldman Sachs recently reduced its oil price forecasts for 2023, citing growing crude supplies and lower demand. The investment bank now expects Brent to trade at $95 a barrel by the end of this year from a previous $90 estimate and $100 in 2024 compared with a prior $97 forecast.
"Once again, Opec+ implements a precautionary production cut like in October 2022. However, unlike then, the momentum for global oil demand is up not down with a strong China recovery, the Brent forward curve is backwardated, and refining margins remain resilient," Goldman Sachs analysts said.
While it is possible that oil prices can move higher to $90 or even $100 per barrel, maintaining them at that level "will be hard", said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
"If the rising oil prices hit the global demand prospects at quite an uneasy time for the world economy (due to the bank stress) and further spurs recession worries, there is a chance that the rally in oil prices fades quickly," she said.
Global oil demand is set to reach record levels this year, with the International Energy Agency (IEA) estimating that China will account for nearly half of its 2023 oil demand growth forecast of 1.9 million bpd.
Research firm Energy Intelligence expects global crude demand to grow to 101.2 million bpd this year, surpassing a previous record of 100.6 million bpd in 2019.
China is the world's second-largest economy and the biggest importer of crude.
In March, Opec Secretary General Haitham Al Ghais said that the group is seeing a “divided market” with one segment showing signs of “promising” growth and the other experiencing a decline.
“There is phenomenal demand growth in Asia [but] what concerns us more is actually the slowdown we see in Europe and the US in terms of the financial situation [and] the inflation,” Mr Al Ghais said at the CeraWeek energy conference in Houston.
Ha Nguyen, executive director for global oil at S&P Global Commodity Insights, said oil prices are set to increase this year in large part due to a “rise in jet fuel demand within China and higher gasoline demand in the Western portion of the world … rising demand in the second half of 2023 will tighten the supply-demand balances”.
Goldman Sachs estimates the reopening of China’s economy and a full recovery in the country's domestic demand will be a boon to the global economy, boosting world gross domestic product by about 1 per cent in 2023 and lead to a rally in oil prices.
Although the oil market reacted positively to the announcement of collective crude output cuts from May until the end of 2023, the White House criticised the decision, calling it ill-advised.
"We don’t think cuts are advisable at this moment given market uncertainty — and we’ve made that clear," Reuters quoted a spokesperson for the National Security Council as saying.
Last year, the US ordered an unprecedented release from its strategic crude reserves in a bid to cool prices and stem market volatility trigged by Russia's war in Ukraine.
Higher oil prices are also counter-intuitive to steps taken to stem still high inflation, complicating the task for central banks such as the US Federal Reserve, which is trying to bring inflation down from 40-year highs to its two per cent target range.
The Fed increased its benchmark policy rate last month and is meeting again in May to set monetary policy.