Saudi Arabia and other OPEC+ oil producers have announced a surprise cut in oil output of around 1.16 million barrels per day, in a move that has started causing an immediate rise in prices.

Meanwhile, the development comes a day before a virtual meeting of an OPEC+ ministerial panel, which included Saudi Arabia and Russia, and which had been expected to stick to 2 million barrels per day of cuts already in place until the end of 2023. The development the United States called inadvisable.

The pledges bring the total volume of cuts by OPEC+, which groups the Organization of the Petroleum Exporting Countries with Russia and other allies, to 3.66 million bpd, equalling to 3.7 percent of global demand.

Oil prices last month fell towards $70 a barrel, the lowest in 15 months, on concern that a global banking crisis would hit demand. Still, further action by OPEC+ to support the market was not expected after sources downplayed this prospect and crude recovered towards $80.

The latest reductions could lift oil prices by $10 per barrel, the head of investment firm Pickering Energy Partners said, while oil broker PVM said it expected an immediate jump once trading starts during the week.

“I expect the market to open several dollars higher … possibly as much as $3. The step is unreservedly bullish,” said PVM’s Tamas Varga.

Top OPEC producer Saudi Arabia said it would cut output by 500,000 bpd. The decision, the Saudi energy ministry explained that the kingdom’s voluntary reduction was a precautionary measure aimed at supporting the stability of the oil market.

“OPEC is taking pre-emptive steps in case of any possible demand reduction,” Amrita Sen, founder and director of Energy Aspects said.

Meanwhile, Iraq will slash production by 211,000 barrels per day, and the United Arab Emirates will decrease output by 144,000 barrels per day.

Kuwait, Algeria and Oman will also lower production by 128,000, 48,000 and 40,000 barrels per day, respectively.

Last October, OPEC+ had agreed to an output cut of 2 million bpd from November until the end of the year, a move that angered Washington as tighter supply boosts oil prices.

Prices Surge As Market Opens

Owing to the announcement of the price cut, oil prices spiked on Monday March 3, 2023. Brent crude, the global benchmark, jumped 5.31% to $84.13 a barrel, while WTI, the US benchmark, rose 5.48% to $79.83. Both were the sharpest price rises in almost a year.

With oil prices now rising, inflation could remain higher for longer, adding pressure to a hot-button issue for consumers around the world.

“The development comes as a blow for inflation,” Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said in a note. “Markets are aware that if the pressure continues, central banks will need to extend or strengthen their interest rate hiking cycles.”

Shares in oil giants rose Monday, with Shell (SHLX) up 4.21%, BP (BP) 4.64% higher and France’s TotalEnergies up 4.56%.

Pre-Emptive Measure

In a note, Goldman Sachs analysts said the OPEC+ move was unexpected but “consistent with the new OPEC+ doctrine to act pre-emptively because they can, without significant losses in market share.”

The collective output cut by the nine members of OPEC+ totals 1.66 million barrels per day, the analysts said. They increased their price forecast for Brent this December to $95 per barrel.

“We don’t think cuts are advisable at this moment given market uncertainty — and we’ve made that clear,” a spokesperson for the National Security Council said. “We’re focused on prices for American consumers, not barrels.”

In October, OPEC+’s decision to cut production had already rankled the White House.

US President Joe Biden pledged at the time that Saudi Arabia would suffer “consequences.” But so far, his administration appears to have backed off on its vows to punish the Middle East kingdom.