Bandar Algaloud/Reuters
- OPEC+ members said Sunday that they'd slash their oil output by more than 1 million barrels a day.
- Crude futures jumped as much as 8% on the unexpected announcement, reigniting inflation fears.
- Here's everything you need to know about the cartel's surprise production cuts.
The Organization of Petroleum Exporting Countries and its allies, together known as the OPEC+, slashed their oil output in a shock decision on Sunday, sending crude prices rallying and igniting fears of a global inflation rebound.
Analysts are already warning that the cartel's latest move could have knock-on effects across the world economy.
Here's everything you need to know.
What happened?
OPEC+ is a loose group of oil-producing countries who coordinate on voluntary supply changes.
Saudi Arabia – widely seen as the cartel's de facto leader – said Sunday that it plans to cut its oil output by 500,000 barrels a day from May until the end of the year, according to the state-owned Saudi Press Agency.
Riyadh said the move was "a precautionary measure aimed at supporting the stability of the oil market", with crude benchmarks slipping steadily lower since October on fears that a global recession could hurt demand.
Fellow OPEC+ members Iraq, the United Arab Emirates, Kuwait, Kazakhstan, Algeria, and Oman also announced crude production cuts totalling 649,000 barrels a day Sunday, per the Associated Press. Russia's deputy prime minister Alexander Novak also the TASS state news agency that Moscow would extend its existing 500,000 barrel-a-day cuts until the end of 2023.
The latest output reductions total to just under 1.15 million barrels of crude oil a day.
What does this mean for oil prices?
Crude oil futures rose sharply after Sunday's announcements.
Brent futures traded 5.1% higher at $84 a barrel at last check, while West Texas Intermediate futures were up 5.3% at just under $80 a barrel. The two benchmarks had spiked as much as 8% Sunday, before giving up some of those gains.
Goldman Sachs strategists immediately upped their year-end Brent crude forecast by $5 to $95 a barrel – which would mean prices rising another 13% from their current level – and said that OPEC+ can easily manipulate the oil market because it dominates global supply.
"Today's surprise cut is consistent with the new OPEC+ doctrine to act preemptively because they can without significant losses in market share," the bank said.
How will this affect the US economy?
The Saudi-led cartel's latest move has reignited fears about inflation in the US, because a, oil rally will likely have a knock-on effect on the prices Americans pay for gas at the pump, as well as their energy bills.
Inflation soared to four-decade highs last year after Russia's invasion of Ukraine squeezed commodity and food prices across the world, although it's started to cool in recent months.
Federal Reserve chair Jerome Powell said in a semiannual testimony to Congress in March 2022 that he assumes the Consumer Price Index will rise around 0.2% for every $10 increase in the price of crude oil, with analysts already worrying that the OPEC+ announcement will trigger an inflation flare-up.
The Fed could respond to any bounceback in inflation by holding interest rates high for a longer period of time – but that would likely drive up rates on mortgages and credit cards, as well as damp investors' appetite for stocks and bonds.
"The development comes as a blow for inflation, with expectations coming down partly balancing on the trajectory of the oil price," Hargreaves Lansdown's lead equity analyst Sophie Lund-Yates said Monday.
"Markets are aware that if the pressure continues, central banks will need to extend or strengthen their interest-rate hiking cycles, the expectations of which will need to be repriced," she added.
What does this mean for Saudi-US relationship?
US president Joe Biden has courted Saudi Arabia's Crown Prince Mohamed bin Salman in the past and triggered a backlash last year when he fist bumped the country's leader, amid allegations that Riyadh had ordered the 2018 assassination of Washington Post journalist Jamal Khashoggi.
But OPEC's supply cuts could strain the relationship between Washington and Riyadh, analysts have warned – because as well as fueling inflation, a run-up in oil prices is likely to boost Russia's crude revenues, which could help to fund Vladimir Putin's war in Ukraine.
"Resultant intensification of geo-political risks may be disproportionately large given that Saudi not only inadvertently aligns with Russia but is also observed to be cozying up with China," Mizuho Bank's head of economics and strategy Vishnu Varathan wrote in a research note Monday.
The Biden administration immediately hit back at OPEC's supply cuts on Sunday.
"We don't think cuts are advisable at this moment given market uncertainty - and we've made that clear," a spokesperson for the National Security Council told Reuters.