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Tuesday, May 20, 2025

Oil Prices Rise As OPEC, Russia-Led Allies Announce Major Output Cut

Oil Prices Rise As OPEC, Russia-Led Allies Announce Major Output Cut

The pound, meanwhile, continued to suffer against the dollar over fears for Britain's recession-threatened economy, falling around two percent to slide under $1.13.

Oil prices climbed Wednesday as OPEC and Russia-led allies announced a major cut in output, while a stocks rally ran out of gas.

The pound, meanwhile, continued to suffer against the dollar over fears for Britain's recession-threatened economy, falling around two percent to slide under $1.13.

In Vienna, ministers from the 13-nation OPEC cartel and its 10 Russian-led allies agreed to reduce two million barrels per day from November.

It is the biggest cut since the height of the Covid pandemic in 2020, and came despite concerns it could fuel inflation further and push central banks to further hike interest rates and therefore increase the chances of a global recession.

Oil prices had slid back to their levels before the war in Ukraine in recent weeks on concerns of a global slowdown, but have surged in recent days on expectations of the production cut.

The main international crude contract, Brent, jumped two percent following the decision.

"Oil futures are expected to continue their rally in the short and medium term, but continued concerns over a global recession and rising inflation are likely to limit the long-term upside," said Srijan Katyal, Global Head of Strategy and Trading Services at the international brokerage ADSS.

Swissquote analyst Ipek Ozkardeskaya warned that the big cut could "backfire" on OPEC+ if investors fear that it will push inflation higher and force central banks to hike interest rates so much that it will trigger a recession.

"The higher the energy prices, the sharper the central banks must kill demand to pull the prices lower," she said before the decision was announced.

"Therefore, a big cut in OPEC production could well backfire, and trigger profit taking and fall in oil prices today," she added.

Rally loses steam


Meanwhile, a stocks rally triggered by disappointing US data on Monday that fuelled hopes the US Federal Reserve could let up in its campaign of aggressive interest rate hikes to tame inflation has petered out.

European stocks finished lower across the board, and Wall Street's main indices were down sharply in late morning trading.

"Market participants are being forced to contend with the possibility that the Fed won't acquiesce to the stock market's hopeful wishes," said analyst Patrick O'Hare at Briefing.com.

In currency trading, the pound took another beating as a speech by British Prime Minister Liz Truss failed to reassure investors about her controversial fiscal plans.

"As Prime Minister Liz Truss took to the stage to try and shore up her support among her party and the country, the pound fell further back and government borrowing costs rose slightly," said market analyst Susannah Streeter at Hargreaves Lansdown brokerage.

"The speech will do little to quell dissent over worries that public services will bear the brunt of the tax cuts plans" she added.

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