OPEC+ cuts: UAE, Saudi markets feel the bounce, will US investors share the sentiment
Will US Fed play spoilsport by going for more inflation-busting rate hikes?
Dubai: Investors on the UAE and Saudi stock markets sure didn’t wait long to express what they thought of the surprise move by OPEC+ that will cut out another 1.16 million barrels a day of oil from the markets beginning May.
The ADX was up nearly 0.5 per cent on sizeable volumes by around 1.40 GST, while on DFM, a similar mood led the index to be up by 0.742. On the Saudi Tadawul, the flagship index was driving up a 1.4 per cent gain through the morning hours, as investors basked in oil finding its feet past the $80 a barrel mark.
Oil’s had a difficult ride these past few weeks, as markets fixated on what was happening to the banking sector and what the US Federal Reserve was doing to its rate hike plans as a result. The benchmark Brent crude price was off 7.2 per cent in the first quarter of 2023.
"The (price) increase depends on the extent of oil demand growth this year, particularly in China," said Bhushan Bahree, Executive Director, Oil Markets, Downstream and Chemicals Team, S&P Global Commodity Insights. "There is no reason to any longer assume that scheduled meetings of OPEC or OPEC+, in-person or virtual, are the only occasions for group decision-making.
"Another lesson is that a subset, or subsets of OPEC or OPEC+ countries can come together to voluntarily adjust production within the overall framework of a formal agreement and output targets."
But on Sunday, the OPEC+ oil producers brought the attention back to oil – and to stunning effect at that, with a surprise out-of-turn production cut. Saudi Arabia would do so by 500,000 barrels a day, while the UAE will take out 144,000 barrels a day.
Which was enough to set off market chatter that oil prices once again are back in play to make a break for $95 a barrel – and even $100. At the same time, possibly messing up Fed’s plans on what to do next with rates.
This is how Simon Ballard, Chief Economist – Market Insights & Strategy at Abu Dhabi’s FAB called it – “Focus this morning (April 3) though will be very much on the oil price after OPEC+ announced at the weekend that the group will be voluntarily reducing its combined output by just over 1.11m bpd from next month until the end of the year.
“This has given a boost to prices of the black stuff this morning (WTI and Brent +4.90 per cent and +4.89 per cent respectively as of 9.17am GST, although both are off their opening highs.”
Not just a symbolic move
Those 1 million plus barrels a day that will not be reaching global markets from May represent quite a sizeable chunk – at over 1 per cent of global output. It sure adds a new dynamic on how central banks and global economies factor in possible changes to inflation rates. And the responses to any further short-term rise.
From OPEC+’s perspective, the messaging was clear. “Before this surprise intervention, crude ended Q1-2023 with its worst quarterly performance since 2020 (at the height of the Covid disruption),” said Bal Krishen Rathore, Chairman and CEO of Century Financial.
The OPEC+ announcement echoed across oil markets, sparking an 8% rally in the prices of Brent and WTI. This marks the largest intra-day gains in oil prices in over a year. The maximum cuts stemmed from Saudi Arabia which has decided to slash 500,000 barrels of crude.
“The turmoil in the global banking industry as well as growing risks of a recession sapped risk sentiment and weighed heavily on oil prices. Therefore, OPEC+ decided to cut output to restore stability to the oil markets and prevent a potential slowdown in global demand growth.
“This decision is a testament to the OPEC+’s ability to be proactive and intervene in a timely fashion to restore order to the oil markets.”
The OPEC+ cut to oil output was no surprise fundamentally, but the way OPEC+ negotiated and announced the cut, and the timing of it, was unexpected - a harbinger of surprises to come. Our base case for this year had already assumed OPEC+ would first cut production this May, and then increase output later in its quest for $80+/barrel oil
Stoking inflation?
OPEC+ did take everyone by surprise with the timing and depth of the cuts. Asian stock markets didn’t see the decision as a net negative on growth chances, at least going by Monday’s trading. The US markets however would have a slightly different take.
“From the US perspective, it’s (latest OPEC+ cut) a slap in the face, but from the Kingdom’s perspective, the cut announced on Sunday is mainly intended to support prices and safeguard against the risk of oil prices falling below Saudi Arabia's budget price of $76/bbl in the current fiscal year, based on official figures,” said Stephen Innes, Managing Partner at SPI Asset Management.
“The second quarter of the year starts with the tailwinds from a somewhat calmer sea around the stress in banking. Still, a new headwind is building in the form of higher oil prices as inelastic global oil demand - with fewer substitutes in an energy-constrained world - means that the ‘OPEC put’ is very much intact.”
Under the current improving conditions, the main DFM index could be heading toward this month’s high and expand the rebound. Overall, better sentiment could also attract new IPO intent, spurred by previous successful ones
OPEC+ had its say…
So, how will the US Federal Reserve respond? Any impact on US consumer prices and inflation from the removal of the 1.16 million barrels a day will be felt only weeks down the line. Which gives central bank chiefs some room to base their next round of rate decisions.
Going by what Jerome Powell says on rates and inflation, the Fed doesn’t seem to have hit a fatigue point on more rate hikes. But consumers worldwide are hurting, and the mood has not been lightened by the steady trickle of job loss announcements in the US – and with the UBS decision – in Europe too.
“The latest spike in oil price may play a hand on what the Fed does next regarding its fight against inflation, particularly if the latest jump is sustained,” notes Tim Waterer, Chief Market Analyst at Kohle Capital Markets. “As oil at the current level won’t be doing the inflation rate any favours.
“In any case, traders are feeling upbeat that the banking troubles of March have not amplified into broader macro problems at this point, as evidenced by the robust equity markets performance of late.”
That’s the point – OPEC+’s decision has so far had a cool reaction from non-US markets. Whether US politicians and consumers react the same way will be known soon enough…
One gets the feeling that the OPEC+ members were not entirely comfortable seeing the languishing below the $70 level in recent times. This latest announcement along with the ongoing shortfall in the US Strategic Petroleum Reserve (SPR) has seen the WTI price jump $10 from where it was seen trading last week