Oil prices surged on Monday after Saudi Arabia and other OPEC+ producers announced a surprise round of output cuts, a potentially ominous sign for global inflation just days after a slowdown in U.S. price data had boosted market optimism.
Brent oil futures jumped $3.94 to $83.83 a barrel on news output would be cut by around 1.16 million barrels per day. U.S. crude climbed $3.84 to $79.51, but was off its early peak of $81.69.
The change comes before a virtual meeting of an OPEC+ ministerial panel, which includes Saudi Arabia and Russia.
"The involvement of the largest OPEC+ members suggests that adherence to production cuts may be stronger than has been the case in the past," said Vivek Dhar, an energy analyst at CBA.
"That means that oil markets may potentially see around 1% of global oil supply or more being curtailed from May."
The latest reductions could lift oil prices by $10 per barrel, the head of investment firm Pickering Energy Partners said on Sunday.
Goldman Sachs lifted its forecast for Brent to $95 a barrel by the end of the year and to $100 for 2024.
"Today's surprise cut is consistent with the new OPEC+ doctrine to act pre-emptively because they can without significant losses in market share," Goldman said.
"While surprising, this cut reflects important economic and likely political considerations."
The surge in energy costs somewhat overshadowed Friday's slower reading for core U.S. inflation, which had seen Wall Street end the month on a strong note.
S&P 500 futures dipped 0.3% on Monday, while Nasdaq futures lost 0.6%. EUROSTOXX 50 futures eased 0.1%, while FTSE futures added 0.1%.
MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) eased 0.4%.
Chinese blue chips (.CSI300) rose 0.7%, brushing off a Caixin/S&P survey of manufacturers which showed a surprise drop in sentiment to 50.0 in March and sat at odds with strength seen in service surveys last week.
Japan's Nikkei (.N225) edged up 0.5%, though a survey of its manufacturers came in just under forecasts.
There was better news from the final Jibun Bank Japan manufacturing survey, which improved to 49.2 in March from February's 47.7, the slowest contraction since November.
FEWER FED CUTS
The jolt to inflation expectations saw yields on U.S. two-year Treasuries rise 4 basis points to 4.11%, while Fed fund futures pared back expectations for rate cuts later in the year.
The market nudged up the probability of the Federal Reserve hiking rates by a quarter point in May to 61%, from 48% on Friday, and had 38 basis points of cuts priced in by year-end.
That in turn helped the dollar gain 0.5% on the Japanese yen to 133.44 , while the euro eased almost 0.5% to $1.0789 . The rise in oil prices is bad news for Japan's trade balance given it imports most of its energy.
The lift in the dollar and yields nudged gold prices down nearly 0.9% to $1,950 an ounce .
The outlook for U.S. rates could be impacted by data on ISM manufacturing and payrolls out this week, though the reaction to the coming Friday's jobs report will be muted by the Easter holidays.
Central banks in Australia and New Zealand hold policy meetings this week, with the latter expected to hike by another quarter point to 5.0%.
Markets are wagering the Reserve Bank of Australia (RBA) will pause its tightening campaign after 10 straight rises, though analysts are more divided on whether it might still hike.
