US oil prices have spiked 40% since Christmas Eve thanks to OPEC’s aggressive production cuts.
Crude’s recovery from last year’s bear market hit another milestone on Wednesday. Oil topped $60 a barrel for the first time since November 9.
The dramatic rebound mostly reflects the effectiveness of the strategy implemented by Saudi Arabia-led OPEC. The oil cartel and its allies, including Russia, agreed last year to sharp production cuts in response to a supply glut formed in part by surging US output.
“The positive sentiment from OPEC’s cuts is outweighing the bearish impact of the US shale boom,” said Matt Smith, director of commodity research at ClipperData. “They are working.”
Crude plummeted as low as $42.53 a barrel on Christmas Eve. Other risky assets, most notably US stocks, have rebounded since then, though not nearly to the same degree as oil.
Fresh evidence of the impact of OPEC’s strategy arrived on Wednesday. US commercial crude oil inventories plummeted by 9.6 million barrels last week, according to a new report from the Energy Information Administration.
That sudden drawdown, which blew away expectations for a tiny build, sent US oil prices higher. Brent crude, the global benchmark, gained 0.6% to $68 a barrel — the highest level in four months.
Saudi Arabia, the world’s largest oil exporter, has held back shipments to the United States, which has the most timely and accurate inventory data. That strategy is aimed at convincing oil traders and analysts that the cuts are effective.
“Saudi Arabia is holding back flows,” Smith said.
OPEC and its allies announced on Monday they are canceling a planned meeting next month to discuss their production cuts. That decision was taken as a sign that the cuts will remain in effect for a longer period of time.
OPEC was burned last year when it ramped up production after the United States announced sanctions on Iran. But the Trump administration granted waivers to major customers of Iran and blunted the impact of the sanctions.
“OPEC is going to be very wary about unwinding these production cuts too soon,” said Smith.
That’s welcome news for Big Oil. Energy stocks posted steady gains on Wednesday, in the face of a retreat in the broader market. Pioneer Natural Resources, Devon Energy and Occidental Petroleum all rose by 1% or more.
Yet the 2019 spike in oil prices is now having an impact at the gas pump. The national average price of regular gasoline rose to $2.55 per gallon last week, up about 12% from the end of 2018, according to the EIA.
The price hikes could draw the ire of President Donald Trump, who has repeatedly attacked OPEC for engineering higher oil prices.
“It’s surprising he hasn’t tweeted anything yet. Everyone is waiting for that,” said Smith.
Beyond tweeting, Trump could influence the oil market by ordering his administration to renew waivers this spring allowing Iran’s customers to keep buying crude from the sanctioned-country.