Oil prices rose by more than 5% on Monday (3.04) as the OPEC cartel announced an unexpected production cut. Saudi Arabia led the production cut by 500,000 barrels per day, with other countries also reducing output. OPEC representatives said the move was to ensure market stability. How might this affect the price of crude?
OPEC data
The announced production cut of 1 million b/d by the OPEC cartel has changed expectations of an oil shortage. Prior to the cut, according to OPEC's March projections and based on global orders and contracts, crude demand and supply were expected to stabilise in the first half of the year and be slightly short in the second half.
However, once the cartel cut is taken into account, shortfalls are expected in each quarter, with an average shortfall of 1.4 million b/d. By comparison, a similarly sized shortfall averaging 1.5m b/d occurred in 2021, when the price increased by more than 50%.
Source: OPEC data, own analysis
It is worth noting that OPEC does not expect a decline in oil demand due to the recession. In 2023, the cartel expects demand to increase by 2.3%. Given this, oil price rises could be expected in the coming months. However, it is difficult to determine their scale.
Source: Conotoxia MT5, XBRUSD, Daily
What does this mean for economies?
Global oil prices are particularly important for the US economy, where inflation largely follows their volatility. For this reason, it could be assumed that a slowdown in oil price increases would reduce disinflation in the USA. By contrast, in Europe, including Poland, inflation was mainly driven by increases in electricity and natural gas prices. Therefore, disinflation in European countries may be faster relative to the USA. In the event of a return of rising inflation in the US, the Fed would be faced with a tough decision to continue its tightening policy, which could negatively affect the S&P 500 index (US500).
Source: Conotoxia MT5, US500, Daily
Grzegorz Dróżdż, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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