OPEC wrangling leads to oil price volatility, Sterling rallies on UK Budget

Oil prices were volatile as news emerged of wrangling between Saudi Arabia and other OPEC+ members, with the growing suspicion that the Kingdom wants higher prices to be achieved through further production cuts. Sterling continued its recent rally after a growth-inclined budget statement and a worsening inflation outlook, pointing to higher UK interest rates for longer.

TODAY’S MAJOR NEWS

OPEC can't agree on supply cuts, oil price volatile

Reports are emerging of angry discussions between Saudi Arabia and other OPEC+ members, with the Kingdom reportedly unhappy with other countries’ “output levels,” with Angola, Nigeria, and the Congo refusing to cut output in January, delaying the group’s policy meeting for a week. Russia, the second largest OPEC+ exporter, sees the market as being “fair and balanced,” a sentiment thought to be shared by other countries in the group.  Oil prices have been volatile, falling from $93.7 per barrel in late September to $73.9 a week ago to $76.3 today.

As we reported yesterday, StoneX energy analyst Harry Altham believes the market is currently well-balanced. However, he sees the possibility of a degree of ‘opportunistic’ inventory replenishment, assuming OPEC+ holds output steady, in Q1 2024. “We say ‘opportunistic’ because the structure of the market continues to dissuade inventory builds but commercial stocks in some European depots are concerningly low.”

Saudi Arabia’s oil policy remains price-driven, having warned speculators against shorting the market last week (something it does regularly when prices dip beneath $80 per barrel). Altham believes the oil market could be set for a choppy week as production discussions continue. “If Saudi Arabia fails to persuade OPEC+ to cut production in the next week, there is a possibility it could ramp-up production to reassert its control of the supply side, but this would be a Draconian measure,” he observes.

UK’s growth budget boosts Sterling

UK Finance Minister Jeremy Hunt’s budget, the so-called ‘Autumn Statement for growth,’ featured reflationary personal tax cuts, reducing employee National Insurance from 12% to 10% for 27 million workers, freezing other taxes, giving businesses tax breaks, increasing the minimum wage, and announced an investment in AI and manufacturing. The ruling Conservative party is trailing heavily in the polls and faces an election in 2024, making this budget political.

These measures were welcomed by commentators after the independent Office for Budget Responsibility (OBR) at the same time slashed its March 2023 growth forecasts and upped its inflation projections, highlighting the twin domestic challenges of high inflation and sluggish growth. Growth forecasts were cut to 0.6% this year and 0.7% next year from the 1.8% and 2.5% predicted in March. In March, the OBR predicted that inflation would fall to 0.9% by the end of 2024, but on Wednesday, it was revised to 2.8%.  Inflation is not expected to hit the Bank of England’s 2% target until 2025, meaning interest rates will likely stay “higher for longer.”

Sterling rallied on a widespread belief that UK interest rates will stay “higher for longer,” up to $1.25 from a low of $1.21 but shy of the mid-summer high of $1.31. The FTSE 100 index rose modestly but appears stuck in its recent trading range.

TODAY’S MAJOR MARKETS

FTSE 100 up modestly on UK Budget

• The FTSE 100 rose 0.3% on receiving the UK Budget’s mixed messages of tax-cutting measures and a worsening economic outlook. The Dax and Nikkei 225 were up 0.2%
• US markets were closed for the Thanksgiving holiday

Sterling Rallies on UK Budget

• The dollar index was down 0.2% to 103.9
• Versus the dollar, Sterling was up 0.3%, the Euro was up 0.2%, while the Yen was unchanged

Oil price down in volatile trading

• Oil prices fell 1.5% to $75.9 per barrel
• Gold prices were unchanged at $1991.5 per ounce, while Silver rose 0.3% to $23.8 per ounce

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com