(Bloomberg) — Oil surged to the highest in more than a year after the OPEC+ alliance surprised traders with its decision to keep output unchanged, signaling a tighter crude market in the months ahead.
U.S. crude futures climbed more than 5% to near $65 a barrel, while its global counterpart Brent also jumped after the OPEC+ producer alliance agreed during a virtual gathering to hold output steady in April. Saudi Arabia will maintain its 1 million barrel-a-day voluntary production cut, saying it is in no hurry to bring back the supply.
OPEC+ has worked to drain a global glut that accumulated during the Covid-19 pandemic through its aggressive supply management, pushing crude futures up more than 30% this year. The strength is also evident along the oil market’s forward curve. Key timespreads have rallied further into a bullish backwardation structure, an indication of tightening supplies.
“This tells you the Saudis are going to keep their foot on the pedal to keep prices firm,” said Michael Hiley, head of over-the-counter energy trading at New York-based LPS Futures. “Demand is only going up and it looks like supply is going to be slower to respond.”
The OPEC+ decision represents a victory for Saudi Arabia, which has advocated for production restraints to keep prices supported. However, there are risks. Higher crude prices could spur additional drilling activity by U.S. shale explorers. Domestic oil rigs are already at the highest since May 2020.
“It’s going to get tight,” said Bill O’Grady, executive vice president at Confluence Investment Management in St. Louis. “The longer prices stay up, the greater the likelihood we will eventually see a supply response from the U.S. But, it’s not going to be as immediate as it would have been in the past.”
OPEC+ had been debating whether to restore as much as 1.5 million barrels a day of output. As part of the agreement, Russia and Kazakhstan were granted exemptions from the deal, according to delegates. The producer group’s next meeting is scheduled for April 1.
The ramifications of swiftly a tightening oil market may start to have a greater impact at the pump as well, with U.S. retail gasoline prices approaching $3 per gallon for the first time in six years.
The surge in crude prices that’s helped send fuel prices soaring is being compounded by refined product supply declines in the U.S. after a deep freeze paralyzed much of the Gulf Coast refining sector late last month. Gasoline futures in New York climbed above $2 a gallon on Thursday to the highest intraday level since July 2019.
Meanwhile, tensions are gathering in the Middle East after Yemen’s Houthi rebels claimed attacks on Saudi targets. The rebels, who are backed by Iran, said they bombed an airbase in Saudi Arabia’s southwest with a drone and hit a Saudi Aramco crude facility in Jeddah. Aramco and Saudi officials didn’t immediately respond to requests for comment.
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