Oil price jumps 8% as OPEC announces surprise million-barrel production cut

Oil prices surged on Monday after Saudi Arabia and other OPEC+ producers announced a surprise cut in the amount of crude they plan to pump out every month.

The price of a barrel of West Texas Intermediate surged eight per cent to as high as $80.67 a barrel on news that the Organization of Petroleum Exporting Countrieswould aim to cut output by around 1.16 million barrels per day.

Russian energy spokesman Dmitry Peskovsaid the move was designed to "keep crude oil and petroleum product prices at a certain level."Officially, Russia is not a member of Saudi-led OPEC, but has been loosely co-operating with the cartel in recent years, a partnership that has been dubbed OPEC+.

Goldman Sachs lifted its forecast for the European oil benchmark known as Brent to $95 US a barrel by the end of the year and to $100 for 2024 following the OPEC news,which was announced on Sunday, a day before a virtual meeting of officials from OPEC+.

"I think the alliance wants to make sure that [oil] surpluses don't extend into the second half of 2023, as they know that most of the economic weakness is going to come then," said Samy Chaar, chief economist at Swiss Bank Lombard Odier.

The oil news rippled through stock markets as shares in U.S. oil giants Chevron and Exxon both jumped up by more than four per cent in pre-market trading.

Bad news for inflation fight

The move by the oil cartel impacted interest rate expectations, as moves to increase the price of oil won't help central banks around the world, who are trying to bring down inflation.

The OPEC move had "fuelled fears that inflation will prove to be a longer-lasting problem for central banks," ING FX strategist Francesco Pesolesaid in a commentary.

Central banks have raised interest rates rapidly in the past year in an effort to bring rampant inflation under control.

"If the output reduction succeeds in pushing global prices higher, global progress in bringing headline inflation measures down could slow, and central banks might be forced to adopt a more hawkish approach," said Karl Schamotta, a strategist with Corpay in Toronto.

Trading in investments known as swaps, which are bets on which direction central bank rates will go, implied the odds of another rate hike by the U.S. central bank next month are at 60 per cent. On Friday, they were only at 50 per cent.