Opec cuts output to boost oil prices – and gives interest rate setters a headache

A sudden and sharp rise in Brent crude is the last thing central banks need, writes James Moore

The impact at the pumps will be felt sooner rather than later given the way forecourt prices move much faster when oil prices are trending higher (AP)

As if those charged with setting interest rates didn’t have enough to worry about, along comes Opec with a red-hot habanero to throw into a dish they hoped had been cooling.

Voluntary production cuts have been agreed among some of the cartel’s biggest producers with the aim of reducing output by 1.16 million barrels of oil a day; that represents a little over 1 per cent of global production but it was enough to trigger a 5 per cent surge in Brent crude prices.

Saudi Arabia, the United Arab Emirates, Kuwait, Iraq, Oman and Algeria are all on board with cuts, which are intended to last from May until the end of the year. Russia has also announced its own measures.

Such exercises have met with mixed success in the past, but the markets’ reaction will please those involved; so much the better (for them) if speculators get involved in pushing prices further upward. The impact at the pumps will be felt sooner or later – probably sooner given the way forecourt prices move much faster when oil prices are trending higher than they do in the other direction.

Smoke signals coming from Opec suggested no change was in the offing, but maybe it shouldn’t come as such a shock. Members will have remembered what happened the last time the West found itself in a banking crisis – the oil price fell to $35 a barrel in late 2008.

The wobbles of some western banks appear to have been contained. Banking shares have been rallying of late but the full economic fallout from higher interest rates is yet to be felt and that will also have an impact on demand.

Opec’s decision is thus pre-emptive, aimed at ensuring the impact on its members petrol-fuelled budgets from any slackening in the world’s thirst for their product is limited. They will have been gratified by the early results. Their move sent ripples across the world’s markets. Britain’s resource-rich stockmarket led the European pack . The prices of companies that use a lot of energy came under the cosh. Currency and bond markets started speculating about the impact on interest rates – especially US interest rates, where the future pathway remains cloudy. This will almost certainly add to the pressure for further upward revisions from the Federal Reserve.

Higher oil prices are just about the last thing that interest-rate policymakers needed, coming as core inflation remains subbornly high. The banks’ rally and the relative calm over banking in the US removes another potential block on interest rate rises given the role higher rates played in the collapse of Silicon Valley Bank and other troubled outfits.

Opec is likely to come under sustained pressure to perform a volte face (or just to quietly cheat the numbers); its increase is certainly a slap in the face for Joe Biden.

Its clout isn’t what it once was but, as Goldman Sachs notes, its members still have “very significant pricing power relative to the past, and today’s surprise cut is consistent with their new doctrine to act pre-emptively because they can without significant losses in market share”.

The lesson is that reliance on burning hydrocarbons comes at a high economic price as well as a ruinous environmental one; higher prices at the pump, and maybe also higher-priced mortgages further down the line, will serve to underline that.