TELF AG examines Oil Prices Surge on Surprise OPEC+ Production Cut
A significant rise
On Monday, oil prices surged, posting the most significant daily rise in nearly a year, after a surprise announcement by OPEC+ to cut more production jolted markets. Brent crude was trading at $85 as of Friday, April 7, after touching the highest in a month at $86.44 earlier in the session. US West Texas Intermediate crude was at $79.84 a barrel, up $4.17, or 5.5%, after hitting the highest level since late January.
The decision by Saudi Arabia and other OPEC+ oil producers to announce further oil output cuts of around 1.16 million barrels per day took many analysts by surprise. According to analysts, the move would cause an immediate price rise and be called inadvisable by the USA. According to Reuters calculations, the pledges bring the total volume of cuts by OPEC+ to 3.66 million bpd, equal to 3.7% of global demand.
The production cut by OPEC+ was intended to help stabilize the oil market, which has been under pressure from several factors, including rising COVID-19 cases, increased supply from Iran, and concerns about the pace of the global economic recovery. The move by OPEC+ helped to offset some of the negative factors that have been affecting the market.
On the demand side, investors remain optimistic about China’s recovery, with PetroChina and Cnooc Ltd. saying a rebounding domestic economy can help cushion the impact of slower global growth. This is good news for the oil market as China is one of the world’s largest oil consumers. The positive sentiment surrounding China’s economy could support oil prices in the coming months.
In addition, Russia’s largest oil producer Rosneft and India’s top refiner Indian Oil Corp agreed to use the Asia-focused Dubai oil price benchmark in their latest deal to deliver Russian oil to India. The decision by the two state-controlled companies to abandon the Europe-dominated Brent benchmark is part of a shift in Russia’s oil sales towards Asia after Europe shunned Russian oil following the military operation in Ukraine more than a year ago.
Meanwhile, the Baltic Index edged down last week by 0.3% to 1,403 on weak demand for smaller vessels. The supramax index fell 3.7% to 1,237, the most significant daily percentage decline since January 13. However, demand for larger vessels continued to increase. As a result, the Capesize index, which typically transports 150,000-tonne cargoes carrying commodities such as iron ore and coal, rose 0.8% to 1,676, and the Panamax index usually takes coal or grain cargoes of about 60,000 to 70,000 tonnes, advanced 1.7% to an over 1-week high of 1,625.
Looking ahead, some analysts pointed to the Japanese steel sector as one of the main drivers for the Capesize and Panamax segments in the coming quarters. In addition, the steel sector is expected to grow as the global economy recovers from the COVID-19 pandemic. This could boost demand for larger vessels, which would be positive news for the Baltic Index.
In conclusion, the surprise announcement by OPEC+ to cut more production has helped to stabilize the oil market, which has been under pressure from many factors. The positive sentiment surrounding China’s economy could also support oil prices in the coming months. The shift in Russia’s oil sales towards Asia is another development to watch, as it could have implications for the global oil market in the long term. Finally, the outlook for the Baltic Index remains mixed, with demand for larger vessels increasing while smaller ships.
