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OPEC+ to cut output, concern over a surge in inflation increases

Crude oil raced to a two-month high this morning on OPEC+ news, the group will be cutting output by more than a million barrels per day and supply issues elsewhere seem to be adding to the short squeeze.

Source: Bloomberg

Crude oil ran over 8% higher first thing Monday morning after the unexpected output cut announced by OPEC+ over the weekend. The blistering rally comes after black gold surged over 9% last week.

Prices have eased off since the jump on the open and thin liquidity within the market at the time may have exasperated the initial move. It is being reported that last week several OPEC+ officials had intimated that there would not be any near-term cut in production.

The cut of over 1 million barrels per day comes on top of news last week that Turkey will no longer be able to source oil from Kurdistan due to an international court of arbitration ruling.

It is estimated that it will leave global markets with 400k-450k fewer barrels per day from that source.

Additionally, Russia has previously stated that they will maintain their production cut of 500k barrels per day through to the end of the year.

Within OPEC+, Saudi Arabia will do most of the heavy lifting, lowering their production by 500k barrels per day.

It seems that the syndicate might be looking at the Fed rate hike cycle as playing its role to slow down economic activity in the world’s largest economy.

Somewhat ironically, the squeeze on oil supply might contribute to inflationary pressures that could see the Fed further reassess its tightening measures.

In response to the cut, a US spokesperson for the National Security Council said, "We don't think cuts are advisable at this moment given market uncertainty.”

China’s move out of pandemic restrictions has not led to the boost in global economic activity that many had hoped for and may have also played a role in the decision.

The unorthodox announcement from the cartel comes a day ahead of the OPEC+ monitoring committee meeting.

The WTI futures contract topped out at US$ 81.69 bbl in early trade while the Brent contract touched US$ 86.44. Both contracts have retraced lower since making those highs.

WTI crude oil chart illustrating the aggressive move

Source: TradingView

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This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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