Global Daily – OPEC and inflation

by: Hans van Cleef , Nick Kounis , Aline Schuiling

In this publication: Oil View: OPEC, non-OPEC extended production cut agreement. Euro Macro: Core inflation stabilises at below 1%

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OPEC, non-OPEC extended production cut agreement.

OPEC decided to extend its 1.2 million barrels per day (mb/d) production cut agreement until the end of 2018. This time, also Libya and Nigeria joined the agreement by implementing a cap on its 2017 production levels. In practice the new agreement now runs from January until the end of the year, as it now incorporates Libya and Nigeria. Iran was said to cap production at 3.8 mb/d, which is its current production level. OPEC remains concerned that investments should flow back in the industry to secure enough supply to meet future demand. On top of that, non-OPEC oil producers – led by Russia – agreed to extend their part of the production cut agreement (0,6 mb/d). The market already priced in a 9-month extension of the deal, building the risk of disappointment.  That disappointment was found in the possibility of a review of the deal during the next meeting in June. The coalition of oil producers signalled that the production cut is working, and that the market is actually finding an equilibrium. Nevertheless, oil inventories are still elevated and therefore more work needs to be done. By extending the agreement, oil markets will continue to normalize. It is now up to the producers’ level of compliance in 2018 to actually see a further rebalancing. The main risk to this rebalancing trajectory lies in oil producers (OPEC, non-OPEC and US shale oil producers) being tempted to increase production after all against the background of rising oil prices. This is not our base case scenario. Global demand will continue to grow at a moderate pace of 1.5 mb/d. In our view, US shale oil production will not increase enough to fully meet the rise in demand. With the OPEC/non-OPEC production cut agreement in place, this would lead to a further normalizing of US, and global, crude inventories. We expect oil prices to rise further to USD 75/bbl at the end of 2018 for Brent, and USD 70/bbl for WTI. (Hans van Cleef)

Euro Macro: Core inflation stabilises at below 1%

The preliminary estimate for eurozone HICP inflation in November came in below the expectations. Headline inflation increased to 1.5%, up from 1.4% in October, while the core inflation rate (excluding energy, food, alcohol and tobacco) stabilised at 0.9%. The stabilisation of core inflation was particularly surprising as Germany had earlier reported a sharp jump in the inflation rate of package holidays in November. Given the heavy weight of Germany in the eurozone aggregate, this would normally have lifted eurozone services sector price inflation by around 0.1-0.2 pps. However, this component of eurozone inflation stabilised at 1.2% in November, implying that the upward impact of Germany was compensated by other countries. Indeed, underlying inflationary pressures in the eurozone as a whole remain subdued, as there still is slack in the eurozone labour market and wage growth has remained modest. Looking at the other main components of HICP inflation, it turns out that the increase in the headline rate in November was totally due to higher energy price inflation (up to 4.7% from 3.0% in October). Looking further ahead, headline inflation is expected to be volatile in the coming months due to base effects related to energy price inflation. We expect it to dip at  the turn of the year before a sharp acceleration in the first half of next year (partly reflecting the uptrend in oil prices we expect – see above). We then see it declining again in the second half of the year. The roller-coaster ride for headline inflation should occur during a period of ongoing rather subdued core inflation. (Aline Schuiling & Nick Kounis)