Oil prices remain high after OPEC’s production cuts

Oil prices surged on Monday after OPEC announced an output cut and remained high on Wednesday, with WTI price just below $81 per barrel. If the WTI price declines, it may encounter support near $72 per barrel, while resistance may be found near $82.5 per barrel.

Oil prices jumped on Monday after OPEC+ producers announced surprise cuts in oil production over the weekend. The organization decided to reduce output by 1.1 million barrels per day, to offset the drop in oil prices from the global banking crisis. According to OPEC representatives, the cuts will start in May and last through the end of the year. Increased supply concerns caused oil prices to skyrocket after OPEC’s announcement, with WTI touching $81.5 per barrel. The increase in oil prices has re-ignited recession concerns, as the high cost of fuel is likely to increase price pressures.

The recent banking crisis has driven oil prices down in the past few weeks. As recession concerns mount, the potential of a banking sector meltdown has reduced the oil demand outlook.

Fears of a slowdown in the U.S. economy also put pressure on oil prices. Recession concerns run high and aggressive rate hikes stifle economic activity, putting a lid on oil prices. The Federal Reserve raised interest rates by only 25 basis points at its meeting in March, bringing the benchmark interest rate to a target range of 4.75% to 5.00%. 

Market odds are currently split between another 25-basis point rate hike at the Fed’s next meeting in May, and a complete pause in rate hikes. The Fed has already slowed the pace of rate hikes and may have to discontinue it's tightening policy to prioritize financial stability over its fight against inflation.

Concerns over China’s economic recovery also reduce the oil demand outlook. China is the world’s largest energy importer and prolonged lockdowns have dampened oil demand. Hopes of economic recovery were revived after the Chinese abandoned its zero-Covid policy. China’s economy remains fragile however and may take longer than anticipated.

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Written by:
Myrsini Giannouli

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