Oil prices rose Tuesday, extending the previous session’s hefty gains in the wake of the surprise decision of OPEC+ to cut its production levels.
By 09:05 ET (13:05 GMT), U.S. crude futures traded 1.4% higher at $81.51 a barrel, while the Brent contract rose 1.1% to $85.89 a barrel.
Both benchmarks jumped more than 6% on Monday after the Organization of the Petroleum Exporting Countries and allies including Russia, a group known as OPEC+, announced over the weekend additional output cuts of just over 1 million barrels per day from May until the end of 2023.
“We had already expected the oil market to tighten over 2H23 and these cuts mean that the oil market will be even tighter for the remainder of the year. As a result, we now expect oil prices to trade above US$100/bbl over the second half of the year,” said analysts at ING, in a note.
Market participants have been betting that the oil market will tighten as expected growth in Chinese demand picks up strongly with the Asian economic giant, the world’s largest crude importer, fully emerging from the strictures it imposed on itself with its zero-COVID policy.
This growth is expected to more than offset a slowdown in Western demand as the economies in Europe and the U.S. retreat, weighed by further central bank tightening.
This theory received a boost Tuesday after German exports rose significantly more than expected in February, posting their biggest increase in 10 months.
“The exports business is benefiting from better-functioning supply chains and the opening of the Chinese economy,” Thomas Gitzel, chief economist at VP Bank, said.
The move was “a precautionary measure aimed at supporting the stability of the oil market,” OPEC said over the weekend, but it may also have been aimed at crude short-sellers as much as anything else, according to analysts at UBS.
It was “possible the surprise cut was aimed to clear the buildup of short futures and options positions in recent weeks,” UBS said, in a note.
That said, the OPEC+ decision came after many had already unwound a large number of their short positions as the turmoil in the banking sector settled.
Next up will be the release of weekly U.S. crude stocks data by the American Petroleum Institute later in the session, following on from last week’s fall of over 6 million barrels.