Oil prices increased in Asian trade on Tuesday following Sunday’s announcement by OPEC+ that they plan to cut more production. Brent crude futures rose 0.5% to $85.34 per barrel, while US West Texas Intermediate (WTI) crude futures traded at $80.83 per barrel, also up 0.5%.
The decision to reduce output targets by 1.16 million barrels per day (bpd) sent shockwaves through the market, leading to gains of over 6% for both benchmarks on Monday.
The new commitments bring the total volume of cuts by OPEC+ to 3.66 million bpd, equivalent to around 3.7% of global demand.
As attention shifts to demand trends and the impact of higher prices on the global economy, investors are concerned that rising oil prices may intensify inflationary pressures and prolong interest rate hikes in many countries, dampening demand.
“The buying spree from the OPEC+ output cut has calmed down and market attention has shifted to the future demand outlook,” said Hiroyuki Kikukawa, president of NS Trading, a unit of Nissan Securities.
“In the short term, demand is expected to rise for the summer driving season, but higher oil prices may intensify inflationary pressures and prolong interest rate hikes in many countries, which could dampen demand.”
The OPEC+ production cuts have led analysts to raise their Brent oil price forecasts to around $100 per barrel by year-end, with Goldman Sachs lifting its forecast for Brent to $95 a barrel by the end of this year and to $100 for 2024.
However, investors are worried about higher costs for businesses and consumers, fearing that rising oil prices could cause an inflationary jolt to the world economy, resulting in more rate hikes.
Market watchers are also trying to determine how much longer the US Federal Reserve may need to keep raising interest rates to cool inflation and whether the US economy may be headed for a recession. In March, US manufacturing activity slumped to the lowest level in nearly three years, which could decline further on tighter credit and higher borrowing costs.
“If crude oil can break above the strong band of resistance at $82/$83, it could get back to the mid- to low $90s, but there will be sellers queuing up to sell at those levels,” said Tony Sycamore, a market analyst at IG in Sydney. “But for anything more than that something has to change dramatically from the demand side of the equation.”
Overall, while the OPEC+ production cuts have boosted oil prices, investors remain cautious about the impact of higher prices on the global economy and demand for oil in the long term.
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