On Sunday, eight OPEC+ members including Saudi Arabia, Kuwait and the United Arab Emirates (UAE), announced plans to voluntarily reduce global oil output by about 1.16 million barrels per day until year-end. What does this mean for the Federal Reserve’s inflation-reduction efforts going forward?
Well, at least domestically, the move will likely amplify supply-related gas inflation. Indeed, in the past year, falling gas prices have largely led the charge in terms of deflation. As a result of tapping into the Strategic Petroleum Reserve (SPR), U.S. fuel costs have fallen from over $5 per gallon in June 2022 to roughly $3.50 per gallon now. Further supply disruptions will likely reapply pressure on the industry, pushing prices back up.
In the past, President Joe Biden has repeatedly criticized energy companies for prioritizing profit margins over the needs of drivers and the economy. Today’s news seemingly reaffirms this sentiment.
With OPEC+’s recent initiative — on top of Russia’s previous plans to cut 500,000 barrels per day — global oil production will likely fall by more than 1.6 million barrels per day. This has fueled rumors of collusion between OPEC+ members and sanction-ridden Russia.
“We don’t think cuts are advisable at this moment, given market uncertainty — and we’ve made that clear,” said a spokesperson for the U.S. National Security Council, per Reuters.
OPEC Output Cut Adds Hawkish Pressure to Next Fed Rate Hike Decision
The Fed has long viewed 2% inflation as the ultimate goal of the U.S. economy. Indeed, after nine rate hikes this cycle, paired with an increasingly aggressive quantitative tightening process, the Fed has managed to lower prices to the current level of roughly 6%. Despite mounting evidence suggesting an impending end to the Fed’s rate hikes, though, today’s news only strengthens the case for continued hawkish policy from the central bank.
According to OPEC+, the group’s recent decision is a “precautionary measure aimed at supporting the stability of the oil market.”
Analysts are already ringing the alarm bell that Brent barrels may climb past $100 from the current price of roughly $84 per barrel. According to Victor Ponsford of Rystad Energy, the resulting impact on the economy could be quite significant:
“The anticipated increase in oil prices for the rest of the year as a result of these voluntary cuts could fuel global inflation, prompting a more hawkish stance on interest rate hikes from central banks across the world. That would, however, lower economic growth and reduce oil demand expansion.”
In fact, much of the deflation enjoyed in the U.S. thus far has been a partial result of oil supply relief a la the SPR. This reversal will only put upward pressure on gas prices — and overall price levels. The Fed will probably face additional scrutiny in its upcoming May rate hike decision as well.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
