Oil prices surge as OPEC maintains production cut targets and China’s thawing Covid-zero stance sparks hope of demand recovery

• Crude oil futures jumped on Monday after OPEC said its oil policy will remain unchanged from October.
• The group has been cutting oil output by 2 million barrels a day due to “market considerations.”
• Prices were also boosted by hopes that China’s eyeing an exit from its Covid-zero stance.

Oil futures jumped Monday, thanks to good news on the demand and supply side: OPEC will be sticking to its production cut target and China is softening its Covid-zero stance, which has sparked hopes of an outsized demand. 

The OPEC+, or the Organization of the Petroleum Exporting Countries and its allies — including Russia — said on Sunday it would stick to the oil production target the group set in October: to slash output by 2 million barrels per day from November through to end-2023.

The production cut is equivalent to about 2% of the world’s demand, and is the largest reduction since the outbreak of COVID-19. 

Back in October, OPEC+ had said that the decision was made “in light of the uncertainty that surrounds the global economic and oil market outlooks.” The move angered the US, and the White House accused the OPEC+ of “aligning with Russia.” That’s because tighter oil supply typically drives up prices, which may help prop up Russia’s war chest, despite sanctions and boycotts over its invasion of Ukraine.

On Sunday, the OPEC said the move was “purely driven by market considerations.”

US West Texas Intermediate oil futures were up 1.1% at 80.84 a barrel at 10.46 p.m. EST on Sunday, while international Brent crude oil futures were also 1.1% higher at $86.47 a barrel — that’s after jumping as much as 2.4% earlier in the day.

Hopes of China’s economic reopening from the pandemic are also boosting market sentiment.

The expectation that the world’s second-largest economy is finally eyeing an exit from Covid came after the country’s top Covid official appeared to tone down the country’s hardline Covid-zero approach last week. Several Chinese cities — including financial hub Shanghai and tech hub Hangzhou — relaxed strict Covid testing rules over the weekend.

The events “point to the beginning of the end of zero-Covid” in China, although they do not point to a quick reopening for the entire country, Nomura economists said in a note on Monday. But there’s certainly optimism surrounding the relaxation of Covid restrictions, Vishnu Varathan, Mizuho Bank’s head of economics and strategy, wrote in a Monday note.

OPEC’s decision came two days after the European Union and the G7 agreed on a $60 a barrel price cap for Russian crude oil — a move that creates uncertainty in the oil markets.

Prices could jump to $120 a barrel next year if Russia cannot find enough “dark ships” — vessels that turn off tracking devices — to export crude covertly, analysts at Bernstein estimate. The price limit on Russian crude takes effect on Monday.

However, Kremlin spokesman Dmitry Peskov said Moscow will not accept the price cap and has made “certain preparations” to counter the move, TASS state news agency reported on Friday.