Oil Holds Biggest Gain in a Year After Shock Supply Cut by OPEC+

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(Bloomberg) — Oil held the largest gain in a year after OPEC+ delivered an unexpected production cut, potentially setting the stage for a deficit.

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West Texas Intermediate was little changed above $80 a barrel after rallying by more than 6% on Monday. The surprise supply cut by the Organization of Petroleum Exporting Countries and its allies blindsided the global crude market, prompting many banks to jack up their price forecasts.

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There’s concern that the move by OPEC+ will inject fresh vigor into inflationary pressures, with Treasury Secretary Janet Yellen criticizing the group’s decision as “unconstructive”. Still, President Joe Biden downplayed the concerns, saying late on Monday that its impact is likely not “as bad as you think.”

Crude has soared about 25% since collapsing in mid-March to its lowest level since late 2021. The rebound was driven initially by expectations that Chinese demand would pick up as Covid Zero was abruptly ended, and by interruptions to supplies from Iraq. It was then supercharged by the OPEC+ decision to remove more than 1 million barrels of daily output.

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“This move sends a strong message to the market, with OPEC drawing a line in the sand regarding oil prices,” ANZ Group Holdings Ltd. said in a note, adding that the supply reduction would quickly push the market into a deficit.

Many on Wall Street including Goldman Sachs Group Inc. upgraded their price forecasts in the wake of the decision. Still, Morgan Stanley bucked the trend, noting China’s demand growth has lagged behind expectations and lowering its outlook. Citigroup Inc. also rebuffed talk of a swift rally back to $100 a barrel.

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