Geopolitics in play amid OPEC cut

OPEC's production cut could reverberate across the globe beyond higher gasoline prices.

"OPEC is in a Cold War with #Biden and the #FederalReserve and is fighting back w/ the only 'weapon' it has - production. DEMAND IS GROWING," tweeted Dan Dicker, an energy trader and founder of The Energy Word newsletter.

JP Morgan and Goldman Sachs said the US decision not to buy back oil to refill its Strategic Petroleum Reserve may have contributed to OPEC's move to cut output.

Saudi Arabia, Russia and their oil-producing allies announced on Sunday that they would scale back production by some 1.2 million barrels of crude a day, or more than 1 percent of world supplies, in an apparent move to raise prices, according to The New York Times.

On Monday, Brent crude was trading around $85 per barrel, up $5.10, according to oilprice.com, and West Texas Intermediate hit $80.52, up $4.85.

The average price of gasoline in the US was slightly above $3.50 a gallon on Monday, according to AAA.

Russian Deputy Prime Minister Alexander Novak said the Western banking crisis was one of the reasons behind the cut as well as "interference with market dynamics", a Russian expression to describe a Western price cap on Russian oil.

"[The organized voluntary cuts] certainly would play into the narrative that the US is losing its influence in the region to ... influence the actions of core OPEC producers like Saudi Arabia and the UAE, which have traditionally been client states of the US," Andy Critchlow, EMEA head of news at S&P Global Platts, told CNBC.

"You can't really look at this in isolation from the wider geopolitical situation in the Middle East, which is seeing these core oil producers shift closer to China, shift much closer to Russia," he said. "You know, they like operating in this multipolar world, instead of being completely tied to US dependency."

The West has accused OPEC of manipulating prices and siding with Russia, which has been engaged in a military conflict with Ukraine since February 2022.

The United States is considering passing legislation known as NOPEC, which would allow the seizure of OPEC's assets on US territory in the event market collusion is proved.

"The voices of the proponents of the NOPEC bill in the US Congress will also get louder and they will accuse OPEC+ (of using) oil as a weapon," Tamas Varga of oil broker PVM told CNBC. "The step (by OPEC+) is unreservedly bullish, for now macro worries are overtaken by supply concerns. The move will also lead to further souring of the Saudi-US relationship."

OPEC+ has criticized the International Energy Agency, the West's energy watchdog in which the United States is the largest financial donor, for releasing oil reserves last year, a move it said was necessary to bring down prices amid fears Western economic sanctions would disrupt Russian supply.

Russia is the largest member of OPEC+ in terms of proven reserves and GDP. OPEC+ includes the 13 members of the Organization of Petroleum Exporting Countries (OPEC) and 11 other non-OPEC members. OPEC holds 80.4 percent of the world's proven oil reserves, while the 11 non-OPEC nations hold 9.7 percent of proven oil reserves, according to nasdaq.com.

The IEA's prediction never materialized though, prompting OPEC+ sources to say it was politically driven and designed to help boost US President Joe Biden's poll ratings.

Another byproduct of the production cuts could be the course of interest rates.

In an interview with Bloomberg on Monday, St. Louis Federal Reserve Bank President James Bullard said: "Oil prices fluctuate around. It's hard to track exactly. Some of that might feed into inflation and make our job a little bit more difficult."

Traders now see a 58.3 percent chance of a 25-basis-point interest rate hike by the Fed in May, up from 48.4 percent on Friday, according to the CME's FedWatch.

"The anticipated increase in oil prices for the rest of the year as a result of these voluntary cuts could fuel global inflation, prompting a more hawkish stance on interest rate hikes from central banks across the world," Jorge Leon, senior vice- president of oil markets research at Rystad Energy wrote in a note to clients, according to marketwatch.com.

Dicker, who was interviewed Monday on Yahoo Finance Live, sees it differently.

"I think this puts a little more speed or a little more heat into the Fed cutting again in May and maybe even another cut after that," he said. "These are the prime weapons that the United States has in keeping oil prices low, and I think that the United States and Joe Biden are going to use them."

A slowdown in US manufacturing reported Monday also could factor into the Fed's next move. Activity slumped in March to the lowest level in nearly three years as new orders plunged. Analysts said activity could decline further due to tighter credit conditions.

The Institute for Supply Management (ISM) survey on Monday showed all subcomponents of its manufacturing PMI (purchasing managers index) below the 50 threshold for the first time since 2009.

Some economists said that suggested a recession was around the corner, while others said much would depend on the services sector, whose PMI remains consistent with a growing economy.

"Economic statistics in the rest of the economy are not showing convincing signs of a recession," said Christopher Rupkey, chief economist at FWDBONDS in New York.

Reuters contributed to this story.