Oil price jumps after OPEC+ production cuts

  • Oil has jumped over +5% higher: OPEC+ has announced cuts of around 1.1 million barrels per day. 
  • The move is expected to be inflationary: US bond yields are higher, and so is the probability of further Fed rate hikes.
  • USD is outperforming: The USD is outperforming major forex pairs today, with CAD also performing well.
  • Equities fall back: European indices are mixed to lower, whilst US futures have fallen back.
  • Metals lower: In commodities, the stronger USD is weighing on metals prices, with silver especially falling.

The OPEC+ production cut is a huge surprise

OPEC+ countries shocked markets over the weekend with the announcement of surprise production cuts.

Despite having previously guided for production to continue at current levels throughout 2023, OPEC+ countries have thrown a curve ball to markets.

In March, the Saudi Arabian oil minister, Price Abdulaziz bin Salman said that the current targets were “here to stay for the rest of the year”.

However, new cuts amounting to around 1.1 million barrels of oil per day (bpd) have been announced. 

In March, Russia announced a 500,000 bpd. This was expected to run until June but has been extended until the end of the year.

This would mean that production cuts will total around 1.6m bps from July.

According to Bloomberg, here is a list of the production cuts of major OPEC countries in bpd:

  • Saudi Arabia to cut by 500,000
  • Russia to cut by 500,000 (this cut is already running from March to June but will be extended until the year-end)
  • Iraq to cut by 211,00
  • UAE to cut by 144,000
  • Kuwait to cut by 128,000
  • Kazakhstan to cut by 78,000

The move is likely to be inflationary

Quite whether OPEC+ countries will be able to fully comply with the reduction in production remains to be seen.

However, the lower production drives the oil price higher and this is potentially inflationary.

This is being seen in bond markets today, where yields are moving higher:

  • The US 2-year yield is +5bps
  • The US 10-year yield is +4bps

The US 2-year yield has moved higher but continues to trade in a key medium-term pivot area between 4% and 4.25%.

The US 2-year yield has moved higher but continues to trade in a key medium-term pivot area between 4% and 4.25%. It would need a move above 4.25% to suggest a significant shift in the outlook.

Despite this though, higher inflation does increase the potential that the Federal Reserve is required to hike rates again, possibly in May.

Although interest rate futures markets are still not pricing for any further rate hikes, the potential for such a move has increased.

The CME Group FedWatch tool shows a jump in the probability of a May hike to 59% this morning. This is up from 48% on Friday.

The US Fed Funds Futures curve reflects this but, more pertinently, also shows that interest rate cuts are being pushed further out to the end of the year.

The curve suggests that only one cut is now being priced, into Q4.

The curve suggests that only one cut is now being priced, into Q4. About a week ago, it suggested there might be as many as three. 

The knock-on impact across asset classes

The jump in oil is reverberating across major markets this morning:

  • If a higher oil price is inflationary, it means higher bond yields.
  • Higher bond yields are positive for the USD, helping the USD to outperform. This is especially being seen with USD/JPY moving decisively higher.
  • A stronger USD is weighing on market sentiment, driving a risk-negative move on metals prices, where silver is underperforming gold.
  • Higher yields are positive for value stocks, but negative for growth stocks. This is why NASDAQ 100 futures are underperforming, whilst the Dow futures are positive.

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