Oil benchmarks surged on Monday after the OPEC+ group announced plans to cut production, causing concerns over tightening supplies. Brent crude settled at $84.93 a barrel, up 6.3%, while West Texas Intermediate crude settled at $80.42 a barrel, up 6.3%, reaching its highest level in two months.
The OPEC+ group, including Russia, shocked the market with Sunday’s announcement that it would lower its production target by 1.16 million barrels per day (bpd). The total volume of cuts by OPEC+ is now 3.66 million bpd, which includes a 2 million barrel cut from last October.
The US President Joe Biden’s administration was notified about the production cut but disagreed with it.
Analysts said a weakening economy and rising oil stockpiles supported the decision. However, the production curbs led to most analysts raising their Brent oil price forecasts to around $100 per barrel by year-end.
This could lead to more aggressive interest rate hikes from central banks, which could eventually push economies closer to a recession. The inflationary impact on the world economy from rising oil prices could also result in more rate hikes.
According to Fawad Razaqzada, Market Analyst at City Index, demand is only likely to get moderately affected by rising oil prices. “People will not stop driving or traveling by plane because of high oil prices. Therefore, demand is only likely to get hurt moderately by rising oil prices,” he said.
Nevertheless, demand for energy could slump in the long-term if oil refiners lower activity to counter rising input costs. This could push prices at the pump to near last year’s record levels.
Mizuho analyst Bob Yawger said that lower refining output could lead to a decline in US manufacturing activity, which has already slumped to the lowest level in nearly three years in March. The crack spread, or profit refiners make in converting crude oil to products, traded at its lowest level since February 24.
Meanwhile, the US gasoline futures contract rose to its highest since January, settling at $2.76 a gallon, up about 2.1%.
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