The oil price surged to near $86 a barrel after the world’s largest producers announced a surprise cut in production , a move that is likely to prompt fresh tensions with the US as western governments try to get a grip on inflation.
The Opec+ group of countries, which includes major producers Saudi Arabia, Iraq and Russia, said they would slash production by around 1m barrels a day, accounting for about 3.7% of global demand.
That is on top of existing plans to continue cutting 2m barrels a day – originally agreed in November – until the end of 2023.
At the same time Russia announced plans to extend its existing production cut of 500,000 barrels a day until the end of the year.
The decision caused an immediate spike in Brent crude futures contracts for May, with the international benchmark for oil prices rising more than 7% to $86 a barrel on Monday morning.
Shares in the UK’s biggest oil producers jumped in response to higher oil prices. BP and Shell were up about 5% on Monday, making them the top risers on the FTSE 100. Harbour Energy and Tullow Oil were the top risers on the FTSE 250 up 8% and 6%, respectively.
While Opec+ representatives said the move was intended to support market price stability, some analysts said members were angling for higher profits.
“Officially, the cartel wants price stability in oil markets,” said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank. “But in reality, they simply want higher prices.”
The International Energy Agency said the cuts announced by Opec+ risked exacerbating a strained market, while Caroline Bain, the chief commodities economist at Capital Economics, said it was hard not to think there was “some geopolitical posturing embedded in these voluntary cuts”.
“It demonstrates the group’s support for Russia and flies in the face of the Biden administration’s efforts to lower oil prices,” Bain said. “Just a week or so ago, the US announced that it will not be creating additional crude demand this year by refilling its strategic reserve. These latest cuts are probably, in part at least, a response to the US decision.”
The cut comes after a drop in oil prices in the first three months of the year, which resulted in its worst first-quarter performance since travel bans came into force at the start of the Covid pandemic in 2020.
But western government are worried that the decision by Opec+ to prop up prices could harm efforts to curb inflation that were originally exacerbated by geopolitical tensions following Russia’s invasion of Ukraine.
Michael Hewson, chief market analyst at CMC Markets UK, said: “The reality is that inflation is unlikely to be receding any time soon short of an economic collapse, and with Opec+ unexpectedly announcing at the weekend that they would be cutting output by 1.1m barrels a day from next month, we could well see the economic boost offered by the recent fall in energy prices start to reverse if this morning’s surge in oil prices gains traction and starts to head towards $100 a barrel.”
The US came out strongly against the Opec+ output cut, which could prompt a further spike in fuel prices and consumer costs more broadly. “We don’t think cuts are advisable at this moment given market uncertainty – and we’ve made that clear,” a spokesperson for the US national security council said.
Under the plans announced, Saudi Arabia will cut 500,000 barrels a day, Iraq will cut 211,000 and United Emirates will cut 144,000. Kuwait, Kazakhstan, Algeria and Oman also announced they would reduce production.
The new Opec+ production cuts will begin in May.
