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Oil prices rise after surprise OPEC production cut

Oil prices rise after surprise OPEC production cut

Saudi Arabia said Sunday that cutting oil production by 500,000 barrels a day was a “precautionary measure to support oil market stability.”

The immediate result so far has been a price hike. Oil prices rose as much as 8 percent Monday in early trading for Brent crude, the international benchmark, before settling back on a 5 percent rise to about $84 a barrel. West Texas Intermediate Crude, the US standard, rose similarly before falling to around $79 a barrel.

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

The Saudi news, combined with cuts announced by several other major OPEC producers on Sunday, will result in a reduction of over 1 million barrels a day, or about 1 percent, in world oil supplies starting next month.

The move showed once again that Saudi Arabia and its oil minister, Prince Abdulaziz bin Salman, are determined to act proactively to keep prices high, perhaps in the $90 a barrel range.

Frequently asked questions about inflation

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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual change in the price of essential goods and services such as food, furniture, clothing, transportation and toys.

What Causes Inflation? This may be the result of increasing consumer demand. However, inflation can also rise and fall on developments that have little to do with economic conditions, such as E.g. limited oil production and problems in the supply chain.

Is inflation bad? It depends on the circumstances. Rapid price increases mean problems, but moderate price increases can lead to higher wages and job growth.

Can inflation affect the stock market? Rapid inflation usually spells trouble for stocks. Financial assets in general have historically performed poorly during inflationary booms, while tangible assets like houses have held up better.

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

However, analysts say it could prove difficult to support prices if demand for oil falls. The jolt of production cuts “may be followed by a realization that the market is much weaker than people think,” wrote Edward Morse, head of commodities at Citigroup.

The global economy continues to be fraught with uncertainty. It’s not clear how quickly China, Saudi Arabia’s biggest oil importer and top customer, will recover from its “zero Covid” lockdowns. Also difficult to gauge is the extent of the damage that the recent turmoil in the banking sector could inflict on overall oil demand. And higher prices will stimulate more investment and production from other producers, such as shale oil drillers in the United States.

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

“This probably won’t be the last production move of the year,” said Mr. Morse.

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

The sight of prices falling to $70 a barrel in mid-March was likely unsettling for the Saudis, and analysts say they may have decided to act before more bad news drives markets lower. Saudi Arabia needs high oil revenues to support ambitious development programs aimed at diversifying the kingdom’s economy away from oil.

Some analysts say the Saudis had no choice but to act.

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

What is clear is that the Saudis are likely to take steps they believe are in their interests, even if their decisions irritate the Biden administration and complicate the Federal Reserve’s efforts to alleviate inflation.

“It has been shown that Saudi Arabia is willing to endure rising tensions in bilateral relations with Washington,” wrote Helima Croft, an analyst at RBC Capital Markets, in a note to clients.

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

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