A surprise OPEC+ output cut is a thorn in the side for disinflation

• OPEC+ announced a surprise oil production cut of 1 million barrels per day, 500 MBDP of which are from Saudi Arabia
• The move was met with prompt criticism from the US, as it adds another unwanted inflationary pressures at a time central banks continue to fight high levels of CPI with higher interest rates at the expense of growth
• Goldman Sachs has upgraded its Brent forecast by December 2023 to $95, and $100 for Dec 2024
• Oil prices gapped aggressively higher at the open
• CAD is the strongest major, JPY is the weakest

Oil prices rallied over 8% in early Asian trade, following the surprise announcement by OPEC+ that they will cut oil production by over 1 million barrels per day, 500k of which will be from Saudi Arabia. Iraq, Kuwait, United Arab Emirates, Kazakhstan, Algeria and Omen are also cutting production which will reduce output by 1.15 million BPD.

I imagine quite a few central bankers and politicians will be rolling their eyes or shaking their fists at this latest development, as it brings another bout of undesired inflation when central authorities have yet to tackle with the first batch. The White House was quick to respond, calling the move “inadvisable”, and it removes the positive sentiment seen on Friday following the softer PCE report from the US.

How markets are reacting to the OPEC+ announcement

The Canadian dollar (CAD) is the strongest major as it is the main beneficiary of higher brent prices, and it also places pressure on the BOC to hike again despite them recently announcing a pause in policy. USD/CAD touched a 29-day low following its weekend gap lower, but the gap has since been closed. AUD/CAD fell to a 4-month low but found support around 90, as some traders bet the RBA will hold interest rates at tomorrow’s meeting. CAD/JPY reached a 3-week high thanks to the yen being the weakest currency of the session, although resistance was found around 99 and prices have handed back around 2/3rds of the initial gains.

S&P 500 E-mini futures are around -0.5% lower from Friday’s high, suggesting a limited impact (so far) on equity market sentiment. Yet WTI crude futures rose around 8% at the open, which puts it on track for its most bullish day in 10 months.

WTI crude futures daily chart:

WTI is currently on track for its strongest daily gain (from the prior daily close) in 10 months. Oil prices are up nearly a third since the March 20th low (+27%), and that spells trouble for those wanting disinflation to continue. Whilst we know OPEC are there to support oil prices, a stronger US dollar could cap gains to a degree if traders bet on a higher for longer terminal Fed rate. Furthermore, today’s high stalled around a yet resistance zone between 82 – 82.60, which includes previous cycle highs, the monthly R1 pivot point and 200-day EMA. We therefor do not favour longs at these levels due to an inadequate reward to risk ratio, but will be on the lookout for potential bullish setups should prices pull back.

Take note that the current VPOC for March (volume point of control) is around 76.80, and that may provide a a potential level of support for dip buyers to reconsider entering. Alternatively, bulls could wait for a break above 82.70 to assume bullish continuation.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge