What’s the good oil?

Oil slides on OPEC+ report

Oil markets are on the move this morning, with oil prices dipping by 2.0% in early trading after the Financial Times reported that Saudi Arabia has indicated to western allies it could raise production to cover any substantial fall in Russian production. That follows on from my comments yesterday that this week’s OPEC+ meeting later today could be a pivotal one if Russia is given an exemption from its production quotas, which would allow the two main swing producers, Saudi Arabia, and the UAE, to ramp up exports to fill the gap.

None of that will alleviate the refining bottleneck/crunch that is causing petrol and diesel prices to soar globally, but it would be a rare piece of good news for the global economy and the inflation fight. It certainly isn’t in OPEC’s interests to send the world into a recession, and probably the only loser would be Russia which is making more money today than pre-Ukraine invasion thanks to soaring oil prices. The cynic in me wonders if some back-room horse-trading has gone on between the West and Saudi Arabia/UAE to get to this point. It’s amazing how US gasoline prices and mid-term elections focus the mind. That aside, today’s OPEC+ meeting may even overshadow the US Non-Farm Payrolls release this week, and if it results in sharply lower oil prices, look for a potential rally in equity and bond markets globally as hiking outlooks are pared.

Overnight, exactly the opposite occurred, after mostly robust US data had markets rolling back their over-optimistic expectations that the Federal Reserve wouldn’t have to hike as much as indicated. US JOLTS Job Openings in April eased slightly to 11.4 million, just above expectations and two job openings for every unemployed American. JOLTS Job Quits remained steady at just above 4.4 million. Following on from firm Retail Sales recently, ISM Manufacturing shrugged off the gloom in Asia and Europe by unexpectedly rising to 56.1 versus an expected drop to 54.5. ISM Manufacturing Orders also rose to 55.1, although ISM Manufacturing Prices slipped to 82.2. ​ ISM Employment fell to 49.6 but the JOLTS data suggests that is because of a lack of workers, not easing labour market requirements.

So, despite concerns around the housing market, and rightly so, the US economy continues to fire on all cylinders. Nothing in that data will give the Fed any concerns about the trajectory of rate hikes, so 0.50% hikes until September it is, and quantitative tightening proceeds. The biggest beneficiary was the US dollar, which soared against the sterling and euro overnight, given their soft data this week. That was helped along by US yields along the curve firming modestly. Wall Street equity markets retraced, but I believe the only modest reaction by the bond market, limited the damage. Probably the most head-scratching move was by gold, which rose slightly despite a higher US dollar. That said, I remain concerned about the recent underwhelming price action by gold.

In Asia today, the calendar is fairly thin with the Manufacturing PMIs now out of the way. Australia’s April Balance of Trade outperformed, rising to AUD 10.495 billion. Retail Sales fell slightly as expected but printed right on forecasts at 0.90%. At midday (SGT), Indonesian Inflation for May is released and is expected to rise slightly YoY to 3.60%. That probably won’t be enough to force Bank Indonesia’s hand and hike rates at the June meeting, and nor has a slightly wobbly rupiah detracted them from supporting Indonesia’s post-pandemic recovery. A print above 4.0% may change that stance though.

Eurozone PPI will be a non-event after the PMI and GDP prints earlier in the week signalled already, that stagflation is alive and well in the war-time economy of Europe. US Factory Orders will grab some attention, especially if the figure is weaker, and market pundits will try and extrapolate tomorrow’s US Non-Farm release from today’s ADP Employment, usually a fool’s errand. But none of this really matters, because as I have said early, today will all be about the outcome of today’s OPEC+ meeting.

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