Weekly Buzz: OPEC+ cuts boost inflation worries

🔼 OPEC+’s decision adds fuel to economic uncertainty 

After a little vacation, oil is back in the spotlight! 

Late Sunday night, several OPEC+ nations – that’s OPEC and friends – announced that they would cut production by more than 1 million barrels a day starting in May until the end of the year. The surprise decision sent Brent crude up 8.3% to more than $86 per barrel. (See Jargon buster below if you need a quick refresh on OPEC and Brent crude.)

🤕 OPEC+ races ahead of a potential demand drop 

OPEC+’s announcement comes against the backdrop of simmering geopolitical tensions and falling demand for crude oil as global markets continue to grapple with uncertainty, especially following recent turmoil in the banking industry. 

Notably, the decision was made outside OPEC’s usual meetings, suggesting “an element of urgency” from members eager to get ahead of a potential price drop, especially as the US and China registered weak manufacturing activity in March. By cutting production, OPEC+ nations can curb any losses they may suffer as a result of lower demand from the world’s biggest economies. 

⛽ What’s oil got to do with investors? 

As OPEC+’s decision pushes up the price of oil, the path of global inflation just got more complicated. 

In our last newsletter, we explored the possibility that turmoil in the financial industry could signal a closer end to the Fed’s current rate hike cycle. 

However, surging oil prices could throw a wrench in the works. Oil has an outsized impact on the wider economy because of how central it is to a wide range of industries – from manufacturing to transportation. Higher oil prices tend to lead to higher prices elsewhere, which can eventually translate into more inflation. 

The market expects oil prices could go even higher: in the wake of the announcement, investors recalibrated their forecasts, with some warning that prices could soar to US$100 per barrel. (For comparison, Brent crude is currently hovering around US$85 a barrel.) In particular, China’s reopening is seen as a force that could push up oil demand and, consequently, prices.

That said, some analysts argue that an upward trajectory for oil prices is “not set in stone” as OPEC+ could also further adjust output if the macro picture changes. 

Put it together and this renewed uncertainty over oil prices could complicate the path ahead for the Fed. 

Find out more about how the Fed has been plotting the path of interest rates through March’s Madness and their impact on your portfolios in our recent CIO Insights.

🌎 What else we’re keeping an eye out on:

Labour data due from the US 

On Friday, we’re due to receive the US’s monthly jobs report. These data points will give us a better idea of how the labour market is doing, with market forecasts suggesting that we’ll see hiring stay relatively robust. A strong job market would signal that the economy is still pretty hot which could prompt the Fed to keep interest rates high for a longer period, even if they don’t raise them any further. 

🎓Jargon buster: OPEC and Brent crude 

OPEC is the acronym for the Organisation of the Petroleum Exporting Countries, a consortium of 13 major oil-exporting nations. 

Iran, Iraq, Kuwait, Saudi Arabia and Venezuela founded the organisation in 1960. Since then, newer members such as Algeria, Congo, Libya, Nigeria, and the United Arab Emirates have joined. Sometimes, non-OPEC, oil-producing countries such as Russia and China may take part  in decisions. With existing OPEC countries, they are collectively known as OPEC+. 

OPEC is often described as a cartel due to their outsized control of global oil supply and coordination on petroleum policies to control prices. 

Brent crude is one of three major benchmarks used to price oil, alongside West Texas Intermediate (WTI) crude and Dubai crude. Brent is an extensively used oil type as it’s simple to refine into diesel fuel and gasoline, and is therefore used to price more than two-thirds of internationally-traded oil. 

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