The surprise production cut from OPEC will be noted by today’s meeting of the Reserve Bank in its interest discussion but more along the lines of a possible short-term boost to cost pressures in the economy and perhaps the harbinger of a medium-term slump in activity.
On the face of it, there’s a case for another 0.25% increase because labour markets remain tight. But there is no wage price inflation, retail sales remain weak, consumer demand has clearly switched from discretionary to non-discretionary goods but property costs and interest rates are keeping inflation elevated.
Australian economists and markets are mixed on the idea of a rate rise or no move from today’s monetary policy meeting. A rate rise pause now seems to be the anticipated result from the RBA policy meeting, judging by the change of emphasis in media reports.
And while there’s expectations of a boost to inflation, some more insightful analysts wonder if the OPEC+ cut is actually a signal that the world’s biggest cartel sees the global economy slowing and wants to pre-empt the impact of that on their revenues, while helping Russia maintain cash flows as it wastes tens of billions of dollars a week in its Ukraine invasion.
In other words, the eventual impact of the production cut could be bearish.
Yesterday’s building approvals and housing finance data for February won’t have any influence today except to confirm that the sector remains weak. House price data for March though will have the central bank wondering about a rebound in the cost of the most influential part of the consumer price index in the past year – apart from household and motorist energy costs.
The OPEC+ cut of 1.16 million barrels a day pushed world oil prices up 8% in electronic trading on the world’s major oil trading platforms at one stage before the gains halved in early European dealings.
While other major producers like Saudi Arabia, Iraq and the UAE and others say they will cut production, Russia said it will merely continue the 500,000 barrel a day cut announced unilaterally in February.
That means Russia has not cut its production with the rest of the group and its half-a-million-barrel reduction seems to have been matched by falling sales.
The OPEC+ cut decision came after world oil prices had fallen by between 5% and 7% in the first three months of the year and returned prices to where they were at the start of this year and under the pre-Ukraine invasion levels 13 months ago.
The price rises, if they stick and flow on to prices of key products like petrol and diesel, will have to potential to further slow the recent easing in inflation rates – for how long remains to be seen.
At around $US80 a barrel for US type crude and over $US85 a barrel (up more than 7%) for Brent style oil, the world’s so-called benchmark oil type, both remain 20% or more lower than the highs after Putin’s Ukraine invasion.
The latest cut pledges bring the total volume of cuts by OPEC+, which groups the Organization of the Petroleum Exporting Countries with Russia and other allies, to 3.66 million bpd according to Reuters, equal to 3.7% of global demand.
The 3.6-billion-barrel cut is the largest since the pandemic in 2020 and will end up signalling the extent of OPEC’s fears about demand.
Last October, the OPEC+ group agreed to an output cut of 2 million bpd from November until the end of the year, a move that angered consuming countries who worried that the tighter supply situation would boost prices.
But while prices did rise, they slumped to $US65 a barrel in mid-March as the global banking fright took root. Brent crude hit a low of around $US72 a barrel at the same time.
What was interesting was that Chinese oil demand has not risen as strongly with the re-opening of the economy from the Covid crackdown from 2021 and 2022 levels, which has in turn also put downward pressure on prices in March.
Analysts put that down to the pipeline effect of buying the oil, arranging for tankers, then transporting it, carrying it to China, offloading, refining and then distributing it. That can take two to three months – longer for Russian crude.
Some American analysts wonder if the real message is a gloomy one from the cuts – OPEC sees the need to ‘do something’ to appease the gloom among members about the outlook (and production shortfalls from many smaller members) and the easiest thing to do is to charge western drivers more for their petrol.
But is it an admission that OPEC and the Saudis especially see the worst of all worlds ahead for the global economy – the much hyped ’stagflation’ becoming a lingering reality over 2023 and especially 2024?
