This week oil prices again broke through the $85 a barrel level, briefly reaching $87 before easing back to $84.6 on Thursday. From the recent low of $69.2 a barrel for Brent Crude set on March 16, oil prices rose 25% to this week’s high of around $87.

Source: TradingEconomics

The recent upwards movement for oil prices started ahead of and gathered pace after an April 2 announcement by the Opec+ group of oil producing nations on an agreement to cut output. The group, which includes Russia, Azerbaijan and Mexico, as well as the historical Opec members led by Saudi Arabia, will reduce its output by 1 million barrels of oil a day. That represents around 1% of total global oil production.

Opec+ previously announced a 2 million barrels a day cut to output in October 2022 and Sunday’s announcement was an unexpected one. It has been interpreted as a pre-emptive move designed to put a floor of around $80 under oil prices, with a $90 target. Oil producers fear a drop in demand over the next year or two as a result of an anticipated global economic slowdown.

But high oil prices in 2022 sparked by Russia’s invasion of neighbouring Ukraine are also seen as one of the biggest factors behind the rampant inflation that forced central banks into rapid rate rises over the last year.

And oil prices remaining elevated this year at the levels Opec+ is targeting will make it harder for central banks to bring stubbornly high inflation back under control. The worry is that will, in turn, mean interest rates will keep rising for longer than may have otherwise been the case. And it is rising interest rates that many analysts see as the biggest threat to global economic growth over coming years.

Does that mean Opec+ may have miscalculated and spurred additional interest rate rises that may deepen and further entrench any economic slowdown this year? Will the move to maintain oil prices through a global economic slowdown reinforce the likelihood and extend of that slowdown, defeating its purpose?

And what might a longer period of elevated oil prices than expected until recently mean for oil and other energy stocks that have soared on the back of record profits last year? Will their valuations jump again? And how much might a longer period of higher fuel and energy prices weigh on margins and profits at other companies that have been struggling with inflation?

How significant is the latest OPEC+ production cut and how will it impact the global economy?

One thing that is clear is that the world’s developed economies are not in favour of oil prices at the level Opec+ are targeting. President Joe Bid has previously warned of “consequences” Saudi Arabia will face after leading production cuts last year.

The USA’s ire was drawn because Opec+ production cuts undermined economic sanctions placed on Russia, the world’s second biggest producer of crude oil after the USA. But the influence of high energy prices on inflation, currently seen as the biggest threat to the U.S. and global economies is also a major source of American angst at the move.

This week the National Security Council commented on the latest output scale down announcement with:

“We don’t think cuts are advisable at this moment given market uncertainty — and we’ve made that clear”.

In the relatively recent past, the USA may well have had enough influence over Saudi Arabia, traditionally its closest ally in the Middle East aside from Israel, to avert such a move. However, current relations are soured as a result of public U.S. condemnation of the country’s human rights record and Saudi Arabia is not in the mood to give the world’s largest economy what it wants – cheaper oil.

But many analysts are not convinced the latest Opec+ production cuts will have a major economic influence. One reason is that the price of natural gas is down significantly on last year. And while it may rise slightly if oil prices hold above $80 a barrel or head towards $90 for an extended period, a repeat of the prices seen at points of 2022 is not expected. That should mean lower energy bills for households and companies.

Otherwise the cost of petrol at the pump might tick up again but not by a huge amount compared to recently and it typically does during the summer months anyway when people drive more.

Opec and Opec+ have also regularly announced production cuts in the past and not followed through on them. Or at least not all members, compromising the outcome of reductions elsewhere. Members have often shown more loyalty to their own self interest than to group solidarity and time will tell how well respected this agreement will prove.

Swissquote Bank senior analyst Ipek Ozkardeskaya believes it’s not impossibly but unlikely that oil prices will return to $100 a barrel. And that if they were to the likely result would be to hit demand hard enough that prices could relatively quickly drop back again.

If Opec+ does succeed in keeping oil prices higher for longer, the consequence would likely be interest rates also going higher and staying higher for longer as the primary weapon central banks have at their disposal to fight inflation. That would increase the risk of global recession and be a negative for a majority of market sectors.

Oil stocks have benefited

But the energy sector is one that would benefit from higher oil prices, as it has over the last year. Oil stocks, which had a fantastic 2022 thanks to high oil and gas prices immediately benefited from Sunday’s Opec+ announcement when markets opened on Monday. The share price of U.S. oil giant ExxonMobil is currently up around 5% for the week. Exxon investors have seen the company’s value rise by almost 90% since the beginning of 2022.

The UK’s two oil giants, BP and Shell, have both seen their share prices gain 4% this week. BP’s valuation has increased by over 40% over the past 12 months and Shell’s by 16%.

The share price of Centrica, the British Gas owner, has also benefited from the Opec+ announcement this week, up over 5.5%, taking gains for the year to 22% and 29% over the last 12 months.

If Opec+ is successful in keeping oil prices in the $80-$100 zone over the next year, energy companies like those mentioned are the obvious beneficiaries. Investors that had been considering locking in profits realised over the past year might now be more inclined to hold onto energy stocks. And those wondering if the sector still had attractive upside after strong gains over the past year may be convinced it does.

If a global recession is to bring prices oil prices below the $80 floor Opec+ wants, other sectors will be suffering. That makes energy stocks look like the may also represent something of a safe haven over the next 12 months or so.

It remains to be seen how impactful Opec+’s announced new oil production cuts prove. But if they do succeed in maintaining elevated oil prices, the only clear winner is the energy sector.