OPEC Surprised Just About Everyone This Weekend When They Announced A New Production Cut

OPEC surprised just about everyone this weekend when they announced a new production cut of 1.15 million barrels/day (roughly 1% of total global production) without holding an official meeting. The market reaction was instantaneous when trading resumed Sunday night with oil prices rallying 7-8% while refined products were up 4-5% before reducing those gains by about 1/3 this morning. 

Several notes are suggesting that the cartel’s surprise move came in response to the US administration walking back plans to buy oil for the SPR when prices dipped below $70 and are another clear signal that the Saudi’s are getting comfortable aligning themselves more with Eastern powers than the US. That said, it’s hard to imagine their new pals in China are thrilled about this news, that will add billions to the cost of their imports.

RBOB briefly set a new 5 month high during the overnight buying spree, before pulling back by about a nickel from those levels.  If the May contract can settle above $2.81, there’s a strong case on the charts that we’ll see a run to the $3 level in April. As has been the case for a few months now, the technical outlook is not nearly as bullish, with the overnight price jump failing to take out levels we saw on the charts a week ago, although it did manage to wipe out the effects of the roll from April to May futures. Similar to RBOB we’ll need to see ULSD climb above $2.80 to give the bulls a path to a more meaningful rally, but that’s still a dime above current value.   

OPEC’s monitoring committee met this morning and noted that member countries were complying with their output cuts that were previously agreed to and highlighted the additional 1.66 million barrels/day of cuts agreed to this weekend, which includes the half million of Russian output reductions that were previously announced.

Money managers were jumping back on the energy bandwagon last week, with large speculators increasing bets on higher refined product prices and covering short positions in WTI after prices bottomed out at $64 the previous week.  Those that covered shorts last week are no doubt breathing a sigh of relief today, while those that didn’t could be forced to do so when the margin calls come in.

Baker Hughes reported a drop of 1 oil rig and 2 natural gas rigs drilling in the US last week, continuing a trend of low enthusiasm by producers for current price levels.  If prices stay in the $80s, it will be interesting to see how quickly that pattern changes in the coming months since labors, material, and now financing, have all become more of a challenge.

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