Oil extends rally as shorts ‘under the bus’ after OPEC+ cut

Oil built on the largest gain in a year after OPEC+ delivered an unexpected and substantial production cut in a shift that tightened the global crude market, widened key timespreads, and likely punished short sellers.

West Texas Intermediate advanced toward $81 a barrel after rallying by more than 6 percent on Monday, with backwardation strengthening. The surprise reduction in supply by the Organization of Petroleum Exporting Countries and its allies blindsided the global crude market, prompting many banks to jack up price forecasts, although some bears remain.

“The supply cuts have thrown short sellers under the bus,” said Jessica Amir, a market strategist at Saxo Capital Markets Ltd., referring to traders who held bets on losses before the move by OPEC+ members including Saudi Arabia.

Crude has soared by about a quarter after collapsing in mid-March to its lowest level since late 2021.

The rebound was driven initially by expectations Chinese demand would pick up as Covid Zero abruptly ended, and by interruptions to supplies from Iraq. It was then supercharged by the OPEC+ decision to remove more than 1 million barrels of daily output from the market.

Widely watched timespreads signaled increased market strength after the OPEC+ salvo. Among them, the gap between the nearest two December contracts for global benchmark Brent rose to $5.71 a barrel in backwardation — a bullish pricing pattern — up from $3.80 on Friday.

The producers’ group began to see the need for a change in policy on March 20, according to people familiar with the matter, when global benchmark Brent sank to a 15-month low.

Many on Wall Street including Goldman Sachs Group Inc. upgraded their price forecasts in the wake of the decision. Still, Morgan Stanley bucked the trend, noting China’s demand growth has lagged behind expectations and lowering its outlook. Citigroup Inc. also rebuffed talk of a swift rally back to $100 a barrel.

“OPEC now has very significant pricing power relative to the past,” Goldman Sachs analysts including Daan Struyven said in a note. Saudi Arabia, the UAE, and Kuwait are expected to be fully and “almost immediately compliant, while adherence from Iraq may be more gradual and imperfect,” they said.

There’s concern that the move by OPEC+ will inject fresh vigor into inflationary pressures, with US Treasury Secretary Janet Yellen criticizing the group’s decision as “unconstructive.”

Still, President Joe Biden downplayed the issue, saying late on Monday its impact is likely not “as bad as you think.”