Oil surged to the highest in nearly two years after the OPEC+ alliance surprised traders with its decision to keep output unchanged, signaling a tighter crude market in the months ahead.

Futures in New York climbed 4.2 per cent, rising the most since Saudi Arabia last shocked markets with its January pledge to unilaterally cut output. Global benchmark Brent also jumped on Thursday. The OPEC+ producer alliance agreed during a virtual gathering to hold output steady in April. Saudi Arabia said it is in no hurry to bring back supply and will maintain its 1 million barrel-a-day voluntary production cut.

“The decision to maintain the current OPEC+ supply cuts for the month of April has given the oil bulls exactly what they needed as far as the tight-supply narrative goes,” said Ryan Fitzmaurice, commodities strategist at Rabobank. “The Saudis shrewdly recognized that in order to maintain the recent upward price momentum and speculative buying interest in oil futures, they needed to ‘feed the bull.’”

OPEC+ has helped drain a global glut that accumulated during the pandemic through its supply management, pushing crude futures up more than 30 per cent so far this year. The strength is evident across many corners of the oil market, with key timespreads widening further in a bullish backwardation structure -- an indication of tightening supplies -- and data from brokers showing rallies in key swap markets in the North Sea.

Meanwhile, Brent options volume rose to the highest since March 2020, according to preliminary trade data compiled by Bloomberg.

The OPEC+ decision represents a victory for Saudi Arabia, which has advocated for production restraints to keep crude prices supported. However, higher prices could spur additional drilling activity by U.S. shale explorers, with domestic oil rigs already at the highest since May 2020. Saudi Arabia appeared unfazed by that risk: Saudi Energy Minister Prince Abdulaziz bin Salman told reporters after the meeting that the U.S. mantra of “drill, baby, drill is gone forever.”

“It’s going to get tight,” said Bill O’Grady, executive vice president at Confluence Investment Management in St. Louis. “The longer prices stay up, the greater the likelihood we will eventually see a supply response from the U.S. But, it’s not going to be as immediate as it would have been in the past.”

OPEC+ had been debating whether to restore as much as 1.5 million barrels a day of output. As part of the agreement, Russia and Kazakhstan were granted exemptions. The group’s next meeting is scheduled for April 1 to discuss production levels for May.

Prices:

• West Texas Intermediate for April delivery rose US$2.55 to settle at US$63.83 a barrel, the highest since April 2019
• Brent for May settlement climbed US$2.67 to end the session at US$66.74 a barrel, the highest since late February

The ramifications of a swiftly tightening oil market may also impact prices at the pump, with U.S. retail gasoline prices approaching US$3 per gallon for the first time in six years.

The rally in crude prices that’s helped send fuel prices soaring is being compounded by refined product supply declines in the U.S. after a deep freeze paralyzed much of the Gulf Coast refining sector late last month. Gasoline futures in New York climbed above US$2 a gallon on Thursday before settling just under the key level.

Meanwhile, tensions are gathering in the Middle East after Yemen’s Houthi rebels claimed attacks on Saudi targets. The rebels, who are backed by Iran, said they bombed an airbase in Saudi Arabia’s southwest with a drone and hit a Saudi Aramco crude facility in Jeddah. Aramco and Saudi officials didn’t immediately respond to requests for comment.

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