In a surprise move Sunday, several members of OPEC+ announced cuts to their intended production outputs from May. Energy traders were caught off guard, as the announcement came ahead of the group's scheduled virtual meeting Monday 3 April.
OPEC+ largest producer Saudi Arabia will be responsible for 500,000 barrels per day of the intended reduction, with Iraq (211,000 barrels per day), UAE (144,000 barrels per day), and Kuwait (128,000 barrels per day) also making significant cutbacks.
The total reduction, which amounts to 1.15 million barrels per day, comes on top of the existing cuts agreed at OPEC's last official Ministerial Meeting in October. Russia confirmed it would extend its existing 500,000 barrels per day voluntary cut until the end of the year.
The move caused crude oil prices to gap higher in early Asian trade on Monday with West Texas Intermediate Crude (WTI) trading up almost 6% to US$80 per barrel. This adds to WTI's already impressive 9% gain from last week. Brent Crude futures were also trading around 6% higher early Monday to US$85 per barrel.
Both WTI and Brent have bounced sharply from their 16-month lows set in mid-March around US$65 per barrel and US$70 per barrel respectively. Crude prices had been sliding after the collapse of Silicon Valley and Signature Banks as fears grew tightening credit conditions would likely crimp global economic growth.
The OPEC+ move aims to steady crude prices in the wake of the banking crisis, and market reaction so far suggests traders expect yesterday's cuts will have an impact. OPEC+ is responsible for around 40% of global crude oil production, and the sum of cuts announced since October will likely lower total production by almost 4%.
West Texas Intermediate Crude Oil (WTI) performance by month last 30 years - click to enlarge
The recent spike in prices of WTI and Brent occurred in a seasonally strong period of the year for crude oil. For example, over the last 30 years, April has proven to be the best month for WTI crude price performance with a median return of just over 4%. Gains in April are also reliable, with positive performance occurring on nearly two-thirds of occasions.
West Texas Intermediate Crude Oil (WTI) chart - click to enlarge
The chart of WTI shows a persistent downward trend in price since the June 2022 high. Sunday's OPEC+ production cut has spiked the price back to the top of the trading range which dominated price action between December 2022 and March this year.
The peak of this range is $83.69, and it is likely to be a key near-term technical resistance point. If the WTI price reverses from $83.69, we may see a resumption of the broader downtrend which could retest the lower region of the December–March range around US$70 per barrel.
However, if recent positive sentiment can sustain the WTI price near the top of the range a break of $83.69 becomes increasingly likely. A close above $83.69 may trigger broader short covering, as well as momentum-based buying, which could instigate a new uptrend in the WTI price.
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