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A shock cut in oil output by the OPEC+ group has thrown a spanner into central banks’ efforts to tame inflation just as pressure on Europe’s cost of living was starting to ease.
The announcement on Sunday by the oil-producing cartel of a reduction of over 1 million barrels per day ― forcing the price up by as much as 8 percent by Monday morning ― has stoked fears of a knock-on effect on the economy as a whole. It comes at a time when inflation is only just starting to slow after reaching record rates in the eurozone since the summer.
It will take about two months for the OPEC+ decision to trickle down to the real economy, as current crude prices make their way to oil products, said Jorge León, senior vice president of Rystad Energy, a market intelligence firm. This will “most likely” increase inflation.
“That’s a problem for Europe, because oil prices are very relevant for headline inflation in Europe” as a net importer of oil, he said. Future gasoline contracts are already trading at higher prices.
This will put pressure on the European Central Bank to continue tightening the money supply by putting up interest rates, and this in turn could have consequences for growth in the eurozone.
“What I’m worried about is the impact that this could have, first of all, on inflation, and therefore, on the attitudes of central banks, and therefore, on economic growth perspectives for this year and for next year,” said León.
Dramatic cut
Annual inflation in the eurozone dropped to 6.9 percent in March from 8.5 percent in February having hit a record 10.6 percent in October. In an effort to bring it back to its 2 percent target, the ECB has continued to increase interest rates from -0.5 percent last summer to 3 percent in March — its fastest-ever tightening cycle.
“The dramatic cut [in oil production] will only add to pressing global inflationary squeezes,” said Nigel Green, CEO of deVere Group, an independent financial adviser. “There’s real concern that the surprise decision announced by Saudi Arabia for OPEC+ will prompt central banks to maintain interest rates higher for longer due to the inflationary impact, which will hinder economic growth.”
The move by OPEC+, which includes Russia and Saudi Arabia, sent prices jumping from just under $80 per barrel of crude at market close on Friday to over $85 at one point on Monday, before falling back slightly. Analysts immediately raised their expectations for future oil prices, with Goldman Sachs projecting crude to reach $95 a barrel by the end of the year.
Concerns linger
It was the second slash in output announced by OPEC+ in under a year, after last fall it cut production by 2 million barrels per day — a decision that was sharply criticized by the U.S.
The move is seen by analysts as a deliberate attempt by the group’s largest countries to push the price of oil higher. It hovered around the $100 a barrel mark last year.
Non-OPEC countries, including the U.S. and those of the EU, can do little to counter the effect, given historically low levels of crude oil reserves. U.S. strategic oil reserves, which Washington can decide to release to counter some of the supply crunch, are at their lowest since 1984.
“It will take some time to see exactly how much this impacts global prices as demand concerns linger, but this is another potential factor exerting upward pressure on inflation,” analysts at Deutsche Bank wrote in a note.
