SINGAPORE – Oil prices jumped on Monday after a surprise production cut by Opec+ that is set to deliver a fresh inflationary jolt to the world economy.

Brent crude soared more than 7 per cent at the open, and was trading at US$84.26 a barrel by 5.09pm Singapore time, up US$4.37 or 5.5 per cent.

US West Texas Intermediate crude touched its highest since late January and was at US$79.89 a barrel, up US$4.22 or 5.6 per cent.

The move brings concerns over inflationary pressures to the fore, adding to worries that higher prices and aggressive monetary tightening by central banks could tip the global economy into recession. 

The Organisation of Petroleum Exporting Countries and its allies (Opec+) shook markets by announcing production cuts of about 1.16 million barrels per day (bpd) on Sunday.

Traders had expected the group to hold output steady after cutting by two million bpd in October.

The pledges bring the total volume of cuts by Opec+ to 3.66 million bpd, according to Reuters calculations, equal to 3.7 per cent of global demand. This includes the 500,000 bpd cut by Russia in March, in retaliation against Western sanctions prompted by its invasion of Ukraine. 

As a result, Goldman Sachs raised its Brent oil forecast to US$95 a barrel for December 2023 from US$90 earlier, and to US$100 for December 2024 from US$95.

“Today’s surprise cut is consistent with the new Opec+ doctrine to act pre-emptively because it can without significant losses in market share,” the bank said.

“Any unexpected one million bpd change in supply or demand conditions over the course of a year can impact prices between US$20 and US$25 per barrel,” said Dr Francisco Blanch, head of commodity and derivatives research at Bank of America (BOA).

While the Opec+ cut surprised markets, the magnitude of the price jump is easing slightly, said Ms Selena Ling, OCBC Bank’s chief economist.

“There is likely to be a bit of an uptick in near-term pressure on oil-related prices for May to July even though crude oil prices remain substantially below their levels from a year ago,” she said.

She added: “This move should not tip the global economy into recession per se, but major central banks may continue to tighten and hike interest rates to combat sticky inflation, and could risk precipitating the next downturn, which remains one of the key risks for 2023.”

Maybank economist Chua Hak Bin said the probability of a US and Europe recession is already quite high, given tightening global monetary conditions and sharp increases in interest rates, and that the “bump up in energy prices will likely raise the odds of a further Monetary Authority of Singapore (MAS) tightening”.

“Energy prices have only a limited impact on Singapore’s economy, given our small geography and weight in the consumer price index... However, Singapore’s core inflation is already well above the MAS comfort zone,” Dr Chua said.

Over the longer run, higher energy prices will undoubtedly add to inflationary risk as it will result in higher manufacturing costs, shipping costs and transportation costs, said Mr Heng Koon How, head of markets strategy for UOB.

He said: “On the growth front, we already have a cautious outlook for Singapore’s economy for 2023, with GDP (gross domestic product) growth expected at 0.7 per cent in 2023 versus the official GDP growth forecast range from 0.5 per cent to 2.5 per cent.”

Still, it is unclear how much of the planned cuts will result in actual volume reductions, given that Opec has historically failed to fully implement agreed cuts, said BOA’s Dr Blanch. BOA maintained its Brent forecast of more than US$90 a barrel in the second half of the year.

Saudi Arabia led the cartel by pledging its own 500,000 bpd supply reduction. Fellow members including Kuwait, the United Arab Emirates and Algeria followed suit, while Russia said the production cut it was implementing from March to June would continue until the end of 2023. 

The initial impact of the cuts, starting in May, will add up to about 1.1 million bpd. From July, due to the extension of Russia’s existing supply reduction, there will be about 1.6 million bpd less crude on the market than previously expected. Russia initially moved to cut production in March in retaliation against Western sanctions.

Riyadh said on Sunday that the cuts were a “precautionary measure aimed at supporting the stability of the oil market”.

But the surprise move could again ignite tensions between the United States and Saudi Arabia. The White House on Sunday said the new cuts were ill-advised under current market conditions, and added that the US will work with producers and consumers to manage petrol prices for Americans.

Relations between Saudia Arabia and the US have been fraught since last year, when the White House’s efforts to cajole the kingdom into pumping more oil fell flat. US President Joe Biden made a controversial trip to the region last July, but came away without any commitments on production. Then in October, when Opec+ made a surprise cut of about two million bpd just weeks before the US midterm elections, Mr Biden vowed there would be “consequences” for Saudi Arabia, but the administration did not follow through.

The move on Sunday was an unprecedented way to decide policy for the group, which has had to adapt in recent years, first to the demand shock of the pandemic and now to the war in Ukraine and the fallout of sanctions.

As recently as Friday, Opec+ delegates had been indicating privately that there was no intention to change their production limits.

Oil fell to a 15-month low in March due to the turmoil caused by the banking crisis, but prices had recovered as the situation showed signs of stabilising. Brent crude, the international benchmark, closed just below US$80 a barrel on Friday, up 14 per cent from its March trough.

But that may not be high enough for the group. Back in October, the last time it made a massive cut that took consumers aback, Nigerian Minister of State for Petroleum Resources Timipre Sylva said the group “wants prices around US$90”.

For its part, Saudi Arabia is embarking on a huge swathe of spending running into trillions of dollars to transform its economy into a tourism hot spot as well as a global logistics and business hub. While much of that spending is driven by a few sovereign wealth funds that may not directly benefit from higher crude prices, government officials have said they will use surpluses to help accelerate domestic investments.

“We see this closely held decision as just one more indication that the Saudi leadership is making its oil production decisions with a clear eye to its own economic self-interests,” said Dr Helima Croft, head of commodity strategy at RBC Capital Markets. BLOOMBERG, REUTERS

• Additional Reporting by Rosalind Ang