Two news bites overnight Thursday – one a big surprise with the Bank of England not lifting interest rates, despite almost universal belief it would, and the OPEC+ group adding another 400,000 barrels a day to global production, as analysts expected it to do.
OPEC+’s decision was the more significant of the two but the market follow through was more surprising – oil prices fell sharply with US West Texas Intermediate futures slumping through the $US80 a barrel mark for the first time in almost a month and settling at $US78.81.
They peaked at $US83.42 and traded through a $US5 a barrel range in bumpy activity before sliding under $US80 a barrel and be under $US79 a barrel in early Asia dealings.
Brent futures fell to just over $US80 a barrel as well.
OPEC+ stuck with the previous decision to add 400,000 barrels a month to its global output 9by reducing the production cap by the same amount) each month, despite pressure from the US and several other countries for a bigger cut.
Reuters said Russian Energy Minister Alexander Novak told a news conference Thursday: “The decision was made previously to increase production by 400,000 (barrels per day) every month, and I underscore every month, until the end of 2022. Today the decision was reiterated to maintain current parameters which were decided on earlier.”
Asked why the group was not boosting its production levels despite complaints and requests from oil consumers like the U.S., India and Japan, Novak replied that OPEC and its allies were maintaining market balance and remaining wary of potential changes in demand.
“From August until now, we have added 2 million barrels of additional production to the market,” Novak said. “So as planned, we are giving the market more and more volume, as it is recovering, at the same time we also see there is a seasonal drop in demand in the fourth and first quarters of the year, and also there are some signs such as a decrease in oil product demand in the EU in October, which we have observed,” Reuters reported.
“Prices of over $80 per barrel are, of course, another reason why OPEC+ will not be in any hurry to add supply to the market, particularly given that U.S. producers have shown little inclination to raise output,” Caroline Bain, chief commodities economist at Capital Economics, said in a note Thursday.
“That said, we think that the gradual increase in OPEC+ output over the course of next year, along with growth in non-OPEC oil output, will flip the oil market into a surplus. As a result, we forecast that the price of Brent will fall to around $60 per barrel at end-2022.”
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Meanwhile The Bank of England held interest rates steady on Thursday, surprising many investors and analysts who thought a rate rise was a dead cert.
Rising inflation – especially energy prices for gas and petrol – plus the higher costs from supply chain problems and labour shortages, had been expected to force the Bank of England to lift rates.
So instead of being the first major central bank to hike rates following the coronavirus pandemic, it remains in the pack with The US Fed, the European Central Bank, the Bank of Japan and the Reserve Bank of Australia in ‘patient’ mode, waiting to see what inflation does next year.
The BoE’s Monetary Policy Committee voted 7-2 to keep its benchmark interest rate unchanged at its historic low of 0.1%, and 6-3 in favour of continuing the existing bond buying (Quantitative Easing, or QE) at a target stock of £875 billion ($US1.2 trillion). The MPC voted unanimously to maintain its £20 billion stock of corporate bond purchases, keeping the total asset purchase program at £895 billion.
In the lengthy post meeting statement, the BoE indicated part of the committee’s reasoning for the delay in raising rates was the recent end of the government’s subsidised wage program, which cushioned workers’ pay during the pandemic.
“There was value in waiting for additional information on near-term developments in the labour market … before deciding when a tightening in monetary policy might be warranted,” the committee said in the post meeting statement.
“The short-term evolution of the labour market will be crucial in determining the scale and pace of the response,” BoE Governor Andrew Bailey said during a meeting conference after the hold decision was announced.
“We do not yet have the necessary hard evidence on the state of the labour market following the end of the furlough scheme to make a sufficiently clear assessment. Over coming months that is likely to change.”
In its assessment, the bank also said it expects inflation to peak at about 5% in April. Now that prospect had seen growing pressure on the central bank, especially from some key officials for an early rise in rates, but that has been resisted.
Which means the BoE is now behind the likes of the Fed and the RBA which have moved, or are about to move to taper the pace of their QE bond buying.
The RBNZ has done that and lifted rates, with rates rising in South Korea and Brazil.
The next meeting of the BoE is in mid-December, but now analysts have no idea if the central bank will be lifting rates this year.
So no rate rise on Guy Fawkes eve in Britain.
