By Saket Sundria and Alex Longley
“Overall, this was the most bullish outcome we could have expected,” JPMorgan Chase & Co. analysts including Natasha Kaneva wrote in a note to clients.
The Organization of Petroleum Exporting Countries and its allies including Russia had been debating whether to restore as much as 1.5 million barrels a day of output. As part of Thursday’s agreement, Russia and Kazakhstan were granted exemptions, allowing them to increase supply marginally in April. The group’s next meeting, set for April 1, will discuss production levels for May.
Saudi Arabia’s bold and unexpected gamble to restrain production is founded upon its view that, this time around, higher prices will not lead to a big increase in output by American shale drillers. Saudi Energy Minister Prince Abdulaziz bin Salman said in an interview after the meeting that shale companies were now more focused on dividends.
Oil’s rebound this year stands to intensify the debate about a potential resurgence in inflation, and complicate the task facing the Federal Reserve as it supports the U.S. recovery. The Treasury market is already looking for signs of faster price gains, with yields rising rapidly. Crude is up about 9% since Tuesday’s close despite a strengthening of the dollar and a steep sell-off in other major commodities, especially economic bellwether copper.
Goldman Sachs Group Inc. raised its Brent forecasts by $5 a barrel and now sees the global crude benchmark at $80 in the third quarter. JPMorgan increased its Brent projection by $2 to $3 a barrel and Australia & New Zealand Banking Group Ltd. boosted its three-month target to $70. Citigroup Inc. said crude could top $70 before the end of this month.
Oil rising to these levels will likely increase strains within OPEC+ as some members will want to pump more to relieve under-pressure economies, Citi said in a note. Top importers such as China and India would also not be happy and the alliance is likely to change course at its next meeting, it said.
The lack of fresh supply was reflected in oil’s futures curve. Brent’s prompt timespread widened to 62 cents in backwardation — a bullish structure where near-dated prices are higher than later-dated ones — from 54 cents Thursday. Gauges further along the oil futures curve also surged.