Oil Tops $88 After Four-Day Runup On OPEC+ Cut And Supply Fears

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(Bloomberg) -- Oil topped $88 a barrel a day after the OPEC+ alliance announced its biggest production cut since 2020.

West Texas Intermediate extended gains with a slight price increase Thursday after jumping 10% over the previous three sessions. The Organization of Petroleum Exporting Countries and its allies agreed Wednesday to slash daily output by 2 million barrels, drawing a swift rebuke from the US as the Biden administration seeks to battle energy-driven inflation.

The reduction in output caps had a smaller price impact than the White House expected, top energy adviser Amos Hochstein said Thursday. Still, the the US benchmark crossed abvove its 50-day moving average intraday on Wednesday for the first time since late August. Brent, the international benchmark, followed suit on Thursday, signaling momentum for even higher prices.

See also: Saudi Arabia Enrages Biden and Aids Putin With Oil Output Cut

“The vulnerabilities abound and now with this OPEC cut, they're just even more pronounced,” said John Kilduff, founding partner at Again Capital. Winter weather and potential attempts by China to ease Covid-19 lockdowns could also add to volatility on the demand side, he added.

Goldman Sachs Group Inc. raised its fourth-quarter forecast for Brent to $110 and said the OPEC+ reduction could prompt the International Energy Agency to coordinate a release of reserves. Morgan Stanley said the move will accelerate crude's path back to $100.

“Notwithstanding demand concerns, the combined impact of OPEC+'s production cut and the EU embargo in Russia's production suggests a tighter oil market ahead,” Morgan Stanley analysts including Martijn Rats wrote in a report. “With our tighter balances, we suspect that Brent will find its way to $100 a barrel quicker than we estimated before.”

President Joe Biden told reporters he was disappointed by the OPEC+ decision and that the administration is discussing alternatives. Among those under consideration are more strategic-oil releases and steps to take with the private sector and allies, said Hochstein.

Saudi Arabia's energy minister said the real-world impact of the cuts will likely be around 1 million to 1.1 million barrels a day from November given some alliance members are already pumping well below their quotas. That still equates to the biggest reduction since the start of the pandemic.

On Thursday, Saudi Arabia surprised traders by keeping its flagship Arab Light crude oil price to Asia unchanged. It cut prices for Europe, while lifted those to the US to a fresh record.

See also: Here's What Goldman to UBS Say About Oil After Big OPEC+ Cut

Speaking after the OPEC+ announcement, Russian Deputy Prime Minister Alexander Novak said moves to cap the price of his country's oil will backfire and could lead to a temporary reduction in its output. The European Union on Wednesday approved a fresh package of sanctions on Moscow that includes the US-led measure to put a price limit on Russian oil.

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