Oil Prices Jump After Surprise OPEC Production Cut

Saudi Arabia said on Sunday that its 500,000 barrel-a-day cut in oil production was a “precautionary measure aimed at supporting the stability of the oil market.”

The immediate result so far has been a price surge. Oil prices soared in early trading on Monday with Brent crude, the international benchmark, rising as much as 8 percent before settling slightly to an increase of 6.5 percent, to about $85 a barrel. West Texas Intermediate crude, the U.S. standard, similarly spiked before easing to about $80.50 a barrel.

The surprise announcement signaled a potential new threat to global efforts to curb inflation and a challenge to the Biden administration, which has pushed for lower gasoline prices. European stock markets were mixed on Monday, while S&P 500 futures pointed toward a somewhat downbeat open.

The Saudi news, combined with cutbacks announced on Sunday by several other big OPEC producers, will bring a reduction of over one million barrels a day, or about 1 percent of global oil supplies, beginning next month.

The move has shown once again that Saudi Arabia and its oil minister, Prince Abdulaziz bin Salman, are determined to be proactive in order to keep prices high, perhaps in the range of $90 a barrel.

“This is a new Saudi style of unpredictable maneuver,” said Karen Young, a senior fellow at the Columbia University Center on Global Energy Policy. In recent days, Saudi oil officials had signaled that current production levels would be maintained through the end of the year.

Analysts say, though, that it may prove difficult to prop up prices if demand for oil is sinking. The jolt from the output cuts “could be followed by realization that the market is a lot weaker than people think,” wrote Edward Morse, head of commodities at Citigroup.

Uncertainties still hang over the global economy. It is not clear how quickly China, the largest oil importer and Saudi Arabia’s most important customer, will recover from its “zero Covid” lockdowns. Also hard to gauge is the extent of the damage that may be done to overall oil demand by the recent turmoil in the banking industry. And higher prices will encourage more investment and production from other producers, like shale oil drillers in the United States.

The Saudis, who lead the OPEC cartel, are signaling that these days they prefer to act rather than wait and see how these trends play out, some analysts said.

“This is probably not their last production move of the year,” Mr. Morse said.

OPEC Plus, made up of OPEC as well as Russia and some others, produces roughly half of the world’s oil. The group had not been scheduled to hold a formal oil ministers’ meeting until June, but the Saudis apparently decided that action was needed. Prices have been weak recently, although they recovered slightly in recent days as banking problems appeared to ease. A dispute between Iraq and Kurdistan had recently disrupted some oil supplies, but a potential settlement was announced over the weekend.

The sight of prices dipping toward $70 a barrel in mid-March was probably unsettling for the Saudis and, analysts say, they may have resolved to act before more bad news propelled the markets down further. Saudi Arabia needs high oil revenues to support ambitious development schemes aimed at diversifying the kingdom’s economy away from oil.

Some analysts say that the Saudis had little choice but to act.

“This move by OPEC Plus looks to restore its credibility as being a proactive, pre-emptive force,” said Gary Ross, chief executive of Black Gold Investors, a trading firm.

What’s clear is that the Saudis are likely to make moves that they decide are in their interest even if their decisions irritate the Biden administration and complicate the U.S. Federal Reserve’s efforts to ease inflation.

“It has been apparent that Saudi Arabia is prepared to endure increased friction in the bilateral relationship” with Washington, wrote Helima Croft, an analyst at RBC Capital Markets, in a note to clients.

Ms. Croft said that the Saudis now view Washington as “just one of several partners” rather than their most important ally, as in the past.