Cooling inflation had markets betting the Fed could slow rate hikes, but OPEC’s surprise output cuts present a new inflation headache.
Global oil prices rose higher on Monday following a surprise decision by OPEC members to add more than a million barrels a day to the cartel’s existing output cuts in a move that could stoke lingering inflation concerns. in the US economy.
In a decision ahead of a meeting of OPEC members, as well as non-member allies such as Russia, scheduled for today in Vienna, nine members of the group revealed plans to cut another 1.66 million barrels of oil from their production. full daily production.
The deal means that OPEC+, which includes Russia, is taking almost 3.4 million barrels of crude off the market each day, a level that is equivalent to around 3.7% of daily global demand.
The cuts will start in May and last until the end of the year, with Saudi Arabia leading the pack by reducing its supply by 500,000 barrels per day. Algeria, Gabon, Iraq, Kuwait, the United Arab Emirates, Oman and Kazakhstan were also named OPEC members following Saudi Arabia’s lead.
ING’s director of commodity strategy Warren Patterson argues that Saudi Arabia and other OPEC members are more comfortable cutting production now as big US companies focus on capital discipline and shareholder returns. on the acceleration of drilling.
“In previous years, OPEC+ would have been hesitant to raise prices too much, fearing that would lead to a strong supply response from US producers,” he said. “However, it is clear that US production growth is much more modest these days, with a change in mindset from US producers. Gone are the days of pumping as much as possible.”
WTI crude oil futures for May delivery, which is closely tied to US gasoline prices, rose $4.24 from Friday’s closing levels in overnight trading to $79.91 a barrel. Brent contracts for June delivery, the global price benchmark, rose $4.38 to $84.27 a barrel.
“US output growth is slowing, leaving more power in the hands of OPEC, hence the much more proactive stance seen in recent months,” the Saxo Bank strategists wrote. “They may see a slower-than-expected pick-up in demand from China, and ultimately getting short sellers out of the market in the process was probably to their advantage in their view.”
The OPEC move also lifted Treasury yields and strengthened the US dollar, as investors eyed the inflationary aspect of oil prices richer during the summer and fall months.
Ironically, that comes after a softer-than-expected reading for the Fed’s preferred inflation gauge on Friday, the PCE price index, for the month of February, which helped propel U.S. stocks to solid gains in the end. of the quarter.
Benchmark 2-year Treasury yields rose 2 basis points to 4.108% in European trade, while 10-year bonds settled at 3.536%. The US dollar index, which tracks the dollar against a basket of six global currencies, rose 0.1% to 102.606.
“The dramatic cut will only add to pressing global inflationary pressures,” said Nigel Green, chief executive of London-based financial adviser deVere Group, who argues that the price increases will “reduce consumer purchasing power, disrupt chains of supply and will lead to higher inflation expectations. .”
“There is real concern that the surprise decision announced by Saudi Arabia for OPEC+ will prompt central banks to keep interest rates higher for longer, due to the inflationary impact, which will hamper economic growth,” he added.
The potentially inflationary rise from higher crude prices is already seeping into the Fed’s rate forecasts, with CME Group’s FedWatch now indicating a 62% chance of another 25 basis point rate hike in May and a 59.2% chance that Chairman Jerome Powell and Co. will keep that rate in place through June.
The OPEC decision is also likely to revive calls for legislation to limit the cartel’s influence in world oil markets.
Last month, Republican Chuck Grassley and Democrat Amy Klobuchar reintroduced the so-called No Oil Producer and Exporting Cartels bill, better known as NOPEC, before a Senate Judiciary Committee after years of failed attempts to bring the 13-member group closer together. in line with US law.
“Current law has rendered the Justice Department powerless to prevent the 13 largest oil-producing countries from manipulating prices and raising costs,” Klobuchar said, referring to the group’s decision last year to cut production in around 2 million barrels per day despite the price shock of Russia’s ongoing war against Ukraine.
