SPI Management Newsletter 14.10.2022
OPEC+ to cut oil production in a surprise move
Oil prices have been steadily falling since they peaked in early June of this year as the world economy has deteriorated. Prices decreased by about 26% between early June and late September. This increased consumer spending power and helped to reduce inflationary pressures. It offered hope that there would be a "soft landing" for the world economy, where inflation eases and a severe recession is avoided. But OPEC+ (a group made up of OPEC members and Russia) declared last week that it has decided to reduce production by two million barrels per day, or around 2% of world output. As a result, costs shot up significantly. This came as a shock and demonstrated that Saudi Arabia and other Gulf oil exporters are in fact supporting Russia in its dispute with Western oil-consuming nations.
The OPEC+ move, moreover, comes at a time when the global oil market is already constrained, when global inflation has skyrocketed, and when many important countries are at substantial risk of recession. This course of action is likely to increase the danger of both inflation and a recession. Furthermore, it happens despite the US government's vigorous lobbying of Saudi Arabia. This may indicate that the Saudi-US alliance has suffered. Evidently, Saudi authorities were not pleased with the US condemnation of Saudi complicity for the death of a US journalist. Saudi Arabia, for its part, supported the production reduction by citing the requirement for increased investment in the oil industry. Higher prices are likely to encourage energy companies to take more risks, not just in OPEC nations but also in the United States.
Governments in the region have been taking a variety of actions to mitigate the inflationary impact and to limit the impact on consumer and business purchasing power while the energy crisis in Europe has increased inflation and decreased real consumer incomes. The most significant government action to date has come from the United Kingdom, where energy subsidies have received 150 billion pounds, or 6.5% of GDP.
IMF issues warning over risk of global recession
The International Monetary Fund has issued a warning against an unruly market repricing, citing rising risks to global financial stability that raise the possibility of market contagion and stress spillovers. The fund said that the world was on the verge of recession due to the confluence of pressures from inflation, war-related oil and food shortages, and increasing interest rates. In its World Economic Outlook, the IMF significantly lowered its predictions for global growth in 2023 and noted that a third of the world's output-producing nations could experience recessions next year.
Alarming US inflation figures imply it is unlikely the Fed will soften tightening programme
The US consumer price increase report released on Thursday was about as awful as it gets for a central bank searching for indications that the biggest inflation issue in decades is beginning to slowly subside.
The indicator showed another worrying increase on a monthly basis, suggesting that underlying inflationary pressures are still growing, even though the yearly pace was little altered at 8.2%. The "core" CPI figure, which excludes volatile commodities like food and energy, increased 6.6% from this time last year.
The Federal Reserve will be forced to go with a fourth consecutive 0.75 percentage point rise at its forthcoming policy meeting in early November because of this larger than expected increase.
Adapted from WEF, CNBC, Deloitte, FT, IMF