OPEC+ shocks markets with large pre-emptive cuts – brace for higher prices (not inflation)
OPEC+ announced a surprise oil production cut of 1.6m b/d (including Russia’s 0.5m b/d target cut in March 2023), abandoning previous “wait-and-see” assurances, tightening market balances into H2 2023 and reinforcing the impact of an expected increase in demand from China (see here and here). There are two immediate takeaways from this shock move. First, given acutely low managed money positioning, low open interest and high volatility, markets can expect an oil price overshoot just as Fed tightening and banking turmoil led prices to fall in March far more than balances warranted. Second, the implications for oil prices are far greater than for annualised inflation (given large base effects in Q2 2023), and by extension should not be read as a turning point for rates (and thus not a definitive recessionary signal of demand slowing in the wake of bank failures).
