VIENNA (AFP) -- Major oil powers led by Saudi Arabia announced a surprise production cut of more than one million barrels per day, calling it a “precautionary” move aimed at stabilizing the market.
The reductions, on top of a Russian decision to extend a cut of 500,000 barrels per day, and despite U.S. calls to increase production, risk stoking inflation and pressure to raise interest rates.
Cuts by Saudi Arabia, Iraq, the UAE, Kuwait, Algeria and Oman from May to the end of the year will top one million barrels per day -- the biggest reduction since the OPEC+ cartel slashed two million barrels per day in October.
Russia, a leading member of the OPEC+ group, said it was also extending an existing cut of 500,000 bpd to the end of this year, describing it as “a responsible and preventive action”.
Oil prices soared almost six percent in Asian trade on Monday morning with West Texas Intermediate jumping by 5.74 percent to $80.01 a barrel and Brent climbing 5.67 percent to $84.42.
A Saudi energy ministry official “emphasized that this is a precautionary measure aimed at supporting the stability of the oil market”, the official Saudi Press Agency said.
The cuts follow a drop in oil prices triggered by jitters over the banking sector, following the collapse of U.S. lender SVB and UBS’s hurried buy-out of troubled rival Credit Suisse, UAE-based oil expert Ibrahim al-Ghitani told AFP.
Brent crude oil prices, trading just below $80 a barrel late last week, should bounce to above $80 as a result of the reductions, he said, calling prices below $80 “unacceptable” for OPEC+.
“The producing countries adhere to a balancing level that supports their large financial budget this year, and their next economic plans,” al-Ghitani said.
The reductions follow a controversial decision in October by OPEC and its allies including Russia -- collectively known as OPEC+ -- to slash production by two million barrels per day.
That cut, the biggest since the height of the Covid pandemic in 2020, also came despite concerns it would fuel further inflation and push central banks to hike interest rates.
OPEC raised its 2023 world oil demand forecast in February, saying it expected demand to grow by 2.3 million barrels per day to an average of 101.87 million barrels per day this year.
But “initial expectations of higher demand in the second half are now challenged by the prospects of continued high inflation and recessionary pressures”, said Persian Gulf analyst Yesar al-Maleki.
“OPEC is taking a pre-emptive measure in case demand reduction in the second half is possibly higher,” he told AFP.