Recent news from OPEC could have an impact on inflation and hence the overall economy. Following is this week’s market recap from JP Morgan, one of the Portfolio Strategists we utilize for client accounts, which discusses the move by OPEC and some implications…
OPEC announced its plan to reduce oil output by 2M barrels a day starting in November. It is worth emphasizing that this is a quota cut and the actual dip in production is expected to be closer to >1M barrels a day. Nonetheless, it will aggravate the supply/demand imbalance, especially as EU and G7 sanctions are set to commence in December. OPEC defended its decision as necessary to protect both
the oil industry and their domestic economies from rising rates and slowing growth. OPEC is likely fearful that a possible recession in 2023 could trigger demand and price destruction. On the other hand, the decision defied the G7’s pleas for greater production in face of a snowballing European energy crisis. Thus, it could be implied that this was a political dig in the ongoing energy war. OPEC’s move will
likely trigger U.S. countermeasures. It is possible that the U.S. could dial back sanctions on Venezuela, allowing the nation to ramp up oil exports. Reopening Venezuela, home to 18% of the world’s oil reserves, would send a powerful signal, but would take time to impact global supply. The U.S. could also release additional supply from its Strategic Petroleum Reserve (SPR). At the time of writing, President Biden called for the release of an additional 10M barrels from the SPR next month, but more could come. The decision could also bring the No Oil Producing and Exporting Cartels Act (NOPEC) back on the table.
As of late, we have seen oil prices fall from a summer high of $122 on June 8 to $76 on September 26. This was a relief for Americans at the pump who faced a national average of $5.47/gallon in June down to $4.29 in September. Unfortunately, the upside risk to oil hitting above $100 again is elevated given OPEC’s decision and the looming winter weather. Looking ahead, oil may not be the near-term disinflationary force we once thought and is likely to encourage continued Fed hawkishness.