Oil prices surged on Monday after Saudi Arabia and other OPEC+ producers announced a surprise cut in their output target, a move that rippled through stock markets and boosted the dollar due to reinvigorated fears about the stickiness of global inflation.
Brent oil futures looked set for its biggest daily percentage gain in around a year, jumping 5.3 per cent to $84.12 a barrel on news OPEC+ would aim to cut output by around 1.16 million barrels per day. U.S. crude climbed 5.75 per cent to $79.99.
Goldman Sachs lifted its forecast for Brent to $95 a barrel by the end of the year and to $100 for 2024 following the oil output change, which was announced on Sunday, a day before a virtual meeting of an OPEC+ ministerial panel including Saudi Arabia and Russia.
“I think the alliance wants to make sure that (oil) surplusses don’t extend into the second half of 2023, as they know that most of the economic weakness is going to come then,” said Samy Chaar, chief economist at Lombard Odier.
“It’s simply indicative of the global economy slowing, which is not necessarily bad news as it’s mainly a self-inflicted slowdown caused by the U.S. and Europe to make sure that inflation is brought closer to target.”
Central banks have raised interest rates rapidly in the past year in an effort to bring rampant inflation under control.
The oil producers’ move spread through stock markets. Oil majors BP, Shell, TotalEnergies and Eni all rose around 4 percent, sending the European Oil & Gas index up 3.7 per cent, set for its biggest one-day gain since November.
Energy-sensitive stocks dropped, British Airways parent IAG fell 1.5 per cent, while tech shares, which struggle in a higher rate environment, also lost some ground, as markets saw higher oil prices leading to sticker inflation, and, in turn higher-for-longer interest rates.
Britain’s commodities-heavy FTSE 100 rose 0.7 per cent. On a regional and global basis the various moves canceled each other out with the European STOXX 600 and MSCI’s 47-country all-world index trading around flat.
The surge in energy costs somewhat overshadowed Friday’s slower reading for core U.S. inflation, which had seen Wall Street end the month on a strong note.
S&P 500 futures slipped 0.2 percent on Monday, while Nasdaq futures lost 0.7 per cent. MSCI’s broadest index of Asia Pacific shares outside Japan lost 0.25 per cent, weighed with tech heavier benchmarks like Hong Kong and Korea underperformed.
OPEC+’s move was also playing out in currency and rate markets, as, said ING FX strategist Francesco Pesole, it had “fuelled fears that inflation will prove to be a longer-lasting problem for central banks.”
“The ultra-volatile market pricing for the Fed’s rate path is once again set to be one of the most impacted,” he added.
