We apologize, but this video has failed to load.

Try refreshing your browser, or
tap here to see other videos from our team.

Posthaste: The 'central bankers of oil' just dropped a bombshell that could change everything Back to video

We apologize, but this video has failed to load.

Try refreshing your browser, or
tap here to see other videos from our team.

Play Video

Good Morning,

Just when things were calming down after the banking crisis, the “central bankers of oil” drop a bombshell.

The Organization of the Petroleum Exporting Countries and their allies including Russia shocked markets yesterday by announcing further production cuts of about 1.16 million barrels a day (bpd).

The group, known as OPEC+, had already cut production in November by two million bpd and were expected to hold output steady to the end of this year. Instead, the pledge — a day ahead of its scheduled meeting — brings cuts to a total of 3.66 million bpd, according to Reuters calculations, about 3.7 per cent of global demand.

West Texas Intermediate spiked as much as eight per cent on the news in the biggest intraday move in more than a year. It was trading at US$80.60 this morning.

If delivered, the cuts would further restrict an already tight oil market that could push oil prices to US$110 a barrel by summer, said Rystad Energy AS’s senior vice-president Jorge Leon in an extraordinary market update today.

Saudi Arabia will shoulder most of the cuts, reducing output by 500,000 bpd, Rystad said. Other participants are the United Arab Emirates, Kuwait, Iraq, Oman, Algeria and Kazakhstan. Russia is extending its existing 500,000 bpd cut until the end of the year.

That all these countries have compliance levels close to 100 per cent with current OPEC+ quotas suggest the voluntary cuts will become reality, Rystad said.

From the supply side, the cuts signal OPEC+ is willing to defend a price well above US$80 a barrel; on the demand side, they may signal that the group believes there are enough recessionary signs in the market.

The cuts are also scheduled to start from May, just as refineries ramp up in preparation for the increased demand of the summer months. Before the cuts, Rystad had estimated the crude oil market would be in deficit by about 1.4 million bpd between May and August.

“Today’s move, like the October cut, can be read as another clear signal that Saudi Arabia and its OPEC partners will seek to short circuit further macro sell-offs and that Jay (Jerome) Powell is not the only central banker that matters,” RBC Capital Markets analyst Helima Croft told Reuters.

“The bottom line is Washington and Riyadh simply have different price targets for their key policy initiatives.”

The White House on Sunday said the OPEC+ decision was ill-advised, adding that the United States would work with producers and consumers on gas prices.

The big concern is that higher oil prices will further stoke inflation, complicating the task of central bankers bent on taming it.

“The announcement, strangely, came ahead of the actual OPEC meeting scheduled … and throws another spanner in the works for central bankers who may have just started to unclench their jaws a little with regards to the inflation situation,” Benjamin Picton, a senior macro strategist at Rabobank in Sydney, told Reuters.

“The durability of declining headline inflation must now be seriously questioned if oil producing countries are determined to ensure that oil prices have already bottomed.”

Odds that the U.S. Federal Reserve will raise rates at its May meeting were up to 63 per cent on Monday morning from 56 per cent on Friday, according to Bloomberg.

Markets still expect a rate cut by year end, but that could change if oil prices reignite inflation.

Nigel Green, chief executive of investing firm deVere Group Ltd., said OPEC+’s “dramatic cut” will only add to global inflationary pressures by pushing up the cost of production and transportation and leading to higher inflation expectations.

“There’s real concern that the surprise decision announced by Saudi Arabia for OPEC+ will prompt central banks to maintain interest rates higher for longer, due to the inflationary impact, which will hinder economic growth,” he said.

_____________________________________________________________

Was this newsletter forwarded to you? Sign up here to get it delivered to your inbox.
_____________________________________________________________________

Canada’s economy started the year with a growth spurt that defied economists’ predictions. Data out on March 31 showed gross domestic product rose 0.5 per cent in January, beating Statistics Canada early estimate of a 0.3 per cent gain and reversing the 0.1 per cent contraction the month before.

The latest numbers led some economists to bump up their growth estimate for the year.
“There were many indications that the economy got off to a solid start in 2023, but today’s double-barrelled blast of strength is well above even the most optimistic views,” BMO chief economist Douglas Porter wrote in a note.

“Even if growth stalls in March, it now looks like Q1 will post growth of 2.5 per cent, up from a flat read in Q4. While we continue to look for a notable cooldown in the next two quarters, we are bumping up our GDP growth estimate for all of 2023 by three ticks to 1.0 per cent.”

The stronger than expected growth could also complicate matters for the Bank of Canada’s battle to bring down inflation, writes Financial Post editor-in-chief Kevin Carmichael.

“The economy’s resilience means higher interest rates remain a possibility this year, and the rate cuts that some forecasters see on the horizon remain a distant bell,” he wrote.

___________________________________________________

_______________________________________________________

The retooling of the Alternative Minimum Tax system in this past week’s federal budget was big news for high-income earners, but there were also changes that affect many other people’s financial plans. Tax expert Jamie Golombek gives us the latest details on the registered education savings plan, registered disability savings plan and first home savings account.

____________________________________________________

Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com, or hit reply to send us a note.