Opec+ output cut puts Fed rate hike on table at next meeting

(Alliance News) - Markets on Monday were caught unawares by an Opec+ oil production cut, which supported the dollar as investors dialled back their dovish Federal Reserve expectations.

Saudi Arabia led a coordinated production cut by major oil powers on Sunday despite US pressure to pump more crude, saying they were aiming at market stability.

Cuts by the Saudis, Iraq, UAE, Kuwait, Algeria and Oman from May to the end of the year will total more than one million barrels per day – the biggest reduction since the Opec+ cartel slashed two million barrels per day in October.

Russia, a member of Opec+, said it was also extending its cuts of 500,000 barrels per day to the end of this year, calling it "a responsible and preventive action".

The Brent price was on the up. A barrel of the North Sea benchmark rose to USD84.43 around midday London time on Monday, rising from USD79.14 around the time of local equities close on Friday.

"Because of the inflationary impact of higher oil prices, the market is beginning to wipe the slate clean of Fed cuts," SPI Asset Management analyst Stephen Innes commented.

Against the dollar, the euro hovered around the USD1.0860 mark around midday London time, compared to USD1.0863 at the European equities close on Friday.

The pound traded at USD1.2364, from USD1.2370 late Friday.

ING analysts commented: "The surprise oil production cut announced by Opec+ is raising inflation fears and – by extension – reducing Fed easing bets, ultimately offering the dollar support."

The Dutch bank had predicted the euro would hit USD1.10 this week, though the oil cartel move means this could be "delayed".

"We had called for EUR/USD to break above 1.10 sometime this week, but the asymmetrically positive impact on the USD of the OPEC+ surprise cut means that such a call now likely requires some disappointing data out of the US, given the lack of euro-specific drivers this week. This is not necessarily our base case, and EUR/USD bulls would probably welcome the pair ending the week around 1.0850/1.0900. Strong US data and hawkish Fed commentary can see the pair test the 1.0700 and 1.0600 supports," ING added.

According to the CME FedWatch Tool, there is now a 40% chance the Fed maintains the federal funds rate range at 4.75% to 5.00% when it decides on rates on May 3. On Friday, investors had priced in a 52% chance of a rate hike pause, according to the tool.

The Fed is now largely expected to enact a 25 basis point rate hike.

The output cut also has political implications, with the US unlikely to be pleased by a what it would mean for oil prices going forward. Western nations are struggling to contain rampant inflation.

"As the dust settles on the latest Opec production cut shocker, it seems less to do with the outlook and more with politics. If the recent discussion in oil circles is correct, the Biden administration had told OPEC they would replenish strategic reserves this year, so the refusal to refill those coffers in the fiscal year 2023, especially after WTI reached lows that were previously indicated as adequate, suggests Opec thinks the US administration walked them down the garden path. Indeed this will get highly politicized, especially if suspicions are correct that China was given a heads-up," SPI's Innes added.

Russia on Monday hailed the decision. The move is "in the interests" of global markets, Kremlin spokesman Dmitry Peskov said, AFP reported.

"It is in the interests of global energy markets for world oil prices to remain at a good level," Peskov told reporters, adding: "Whether other countries are happy with this or not is their business".

By Eric Cunha, Alliance News news editor

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