Morning Market Brief: Tuesday, April 4, 2023

Oil prices could swing back higher?

At its April meeting this past weekend, the Organization of the Petroleum Exporting Countries (OPEC+) made a decision that surprised markets and prompted concerns that oil could again reach US$100. OPEC+ announced it would reduce oil production beginning in May until the end of the year. ?

• OPEC+ announced it would cut oil production by one million barrels per day from May until the end of the year to help balance the market.
• The announcement surprised markets. Markets didn’t expect the significant pullback in production. OPEC+ earlier stated it would hold supply steady amid a tight oil market. Recent U.S. data revealed falling oil inventories.
• OPEC+ wants a higher price of oil, with some market participants considering whether oil could again reach US$100 per barrel in response to the supply cuts. In its monthly report in March, the oil cartel projected lower demand in 2023 than its previous projection.
• The supply cut could keep inflation elevated. Rising oil prices have been one of the key contributors to surging inflation worldwide. Inflation has been pulling back in recent months, alongside oil prices. However, a deep supply cut could increase prices, weighing on global consumers. Furthermore, global central banks might need to keep rates higher for longer if inflation remains elevated.
• Oil prices rose higher in the first trading session after the announcement. On the S&P/TSX Composite Index, the energy sector posted a relatively strong return yesterday.

The deep supply cut by OPEC+ will likely put upward pressure on oil prices. The move could be a mixed bag for the Canadian economy. It could keep inflation and interest rates high, weighing on Canadian households and businesses. Conversely, it could positively affect Canadian energy sector stocks, which would benefit from higher oil prices and potentially improved profits.

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