Oil production cuts announced by Saudi Arabia’s energy minister on Sunday have led crude prices marginally higher while boosting shares in oil firms such as BP PLC (LSE:BP.) and Shell PLC (LSE:SHEL, NYSE:SHEL).
West Texas Intermediate rose 1.6% to US$73.10 per barrel by mid-day on Monday, following Sunday’s production cut announcement, while Brent saw marginally a slimmer gain of 1.4% as it hit US$77.26.
However, April’s failed effort to artificially bump up oil prices has left analysts pondering whether the latest cuts will work given the still-skewed macroeconomic outlook.
“Oil prices are trapped in conflicting tides between production cuts on one hand, and concerns about demand as China’s recovery slows,” Hargreaves Lansdown analyst Susannah Streeter commented.
A recession in the US “looms,” she added, with fears over the world’s largest economy having weighed into oil prices after OPEC+’s attempts to lift prices earlier this year.
“For now, this production cut is unlikely to show up in a dramatic way at the pumps,” Streeter reassured.
That said, investors in oil giants Shell PLC (LSE:SHEL, NYSE:SHEL) and BP PLC (LSE:BP.) seemed convinced by the news, with shares in the pair rising 1.1% and 1.5% respectively by Monday afternoon.
AJ Bell analyst Russ Mould echoed Streeter’s view that the pair’s share gains were largely responsible for boosting the FTSE 100 higher early on, given the firms’ “heavy weighting” on the index.
Analysts did warn over the long-term effects of the cuts though, pointing to potential supply shortages which could emerge later this year.
“It will be a question of physical shortfall driving prices if the global economy holds up ok and demand remains firm,” Markets.com analyst Neil Wilson explained.
Regardless, oil prices should remain “way off the excruciating levels of last summer,” Streeter added, when barrels of WTI and Brent peaked at around US$120 each in March 2022.
Shares in FTSE 250-listed Harbour Energy PLC (LSE:HBR) rose 2% on Monday, while oil major TotalEnergies SE (NYSE:TOT, EPA:TTE) climbed 0.7% higher.
US firms Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) also enjoyed gains in pre-market trading.