Daily Commentary BY THE CURVE TEAM –

OPEC Extends Cuts

26th of May, 2017

Overnight, OPEC formally announced what had already been widely known, that production cuts that are currently in place would be extended for a further 9 months. The cuts are designed to rebalance global oil markets that are awash with oil and put a floor under prices.

Try telling the market that, as oil was hammered 5% overnight in a classic buy the rumour, sell the fact trade. The market was hanging out for OPEC to step up measures around production and when they simply extended the current arrangement, oil was sold heavily.

I wrote early last week about the importance of oil prices when it comes to inflation. The outlook for inflation is still heavily influenced by the direction of oil prices and the latest move, on the surface should help to underpin the outlook for higher prices.

The only problem with that outlook is that as prices stabilise and start to rise, it brings more marginal players back into play, adding to supply and offsetting OPEC’s efforts to drive prices higher.

With the production cut extension now formalised, the focus will turn back to producer compliance and inventory data for signs that the cuts are having the desired effect.

David Flanagan

Director - Interest Rate Markets