Will Opec increase oil output as Russia disruption lifts prices?

Will Opec boost oil output to counter Russia supply disruptions?

In the oil market this week all eyes will be on Opec’s next ministerial meeting on Thursday, after G7 leaders called on the producer group, led by Saudi Arabia, to boost output to compensate for the disruption generated by Russia’s invasion of Ukraine.

The US has been pressuring Saudi Arabia and other Opec members to increase output since September, but the G7 statement ups the ante. Members of the Opec+ alliance, which includes Russia, have so far stuck to a plan agreed last year to only gradually replace production cut at the start of the pandemic.

But with analysts forecasting that a growing international boycott will force Russia’s production to fall by as much as 3mn b/d from April, the Opec case for business as usual is weakening. If Opec members accept that Russian production is likely to fall significantly “there are few advantages and multiple disadvantages, in staying within the current Opec+ agreement”, analysts at Standard Chartered wrote in a note.

Whether Opec is able to substantially increase output is another matter. The group has consistently failed to hit its current monthly increase target of 400,000 barrels per day and Opec spare capacity is now estimated to have fallen to between 2mn and 3mn b/d, concentrated in Saudi Arabia and UAE.

Top oil traders at the Financial Times Commodity Summit in Lausanne last week, including Doug King, head of RCMA’s Merchant Commodity Fund, argued that even those low spare capacity figures were overstated and that Saudi Arabia was sticking to the Opec+ agreement because it does not have any more barrels to offer. King predicted that Brent crude, which was trading at around $116 a barrel on Friday, would soar to between $200 and $250 a barrel this year. Tom Wilson

Will the US economy record a third month of powerful jobs growth?

Employment in the US is expected to have grown again in March, the third month of big gains, albeit at a slower pace than in February

The closely watched labour department report on Friday is forecast to show that 488,000 jobs were added in March, compared with 678,000 in February, and that the unemployment rate fell again, to 3.7 per cent from 3.8 per cent, according to a Bloomberg poll of economists.

US jobs reports have dramatically exceeded expectations in recent months: February’s print was expected to show 400,000 jobs were added. January also recorded a surprise jump in jobs added — as well as upwards revisions to the data from November and December — despite the rise in Omicron cases.

The report will be the first since the Federal Reserve raised interest rates at its March policy meeting after slashing them to near zero at the beginning of the pandemic. At the meeting, the Fed’s forecasting mechanism known as the ‘dot plot’ also showed that officials on average expect to raise interest rates at each of the subsequent meetings this year.

A weak report could raise questions about the capacity for the US economy to withstand the slowdown that typically accompanies rate increases, while a stronger report could point to continued inflationary pressures in the labour market. Kate Duguid

Will eurozone inflation reach a new record high?

Eurozone inflation is expected to have surged further in March from its all-time high of 5.9 per cent reached in the previous month.

Economists polled by Reuters forecast consumer prices growth to have accelerated to 6.5 per cent when the flash estimate is released on Friday. Core inflation, which excludes the more volatile food and energy prices, is expected to jump to 3.3 per cent from 2.9 per cent in the previous month.

This means that headline inflation would be running at more than three times the 2 per cent target of the European Central Bank, with surging energy prices following Russia’s invasion of Ukraine pointing to a further acceleration in the months ahead.

Higher inflation is largely expected to materialise through more expensive energy costs, but other factors are also forecast to play a role. Following the war, prices of agricultural commodities and fertilisers, of which both Russia and Ukraine are major suppliers, have also increased substantially. “Based on past evidence, we estimate this will considerably increase food inflation in the eurozone around six months from now,” said Paul Hollingsworth, economist at BNP Paribas.

As a result, Hollingsworth now expects headline inflation to peak at 7.4 per cent on average in the second quarter, pushing the annual rate to 6.7 per cent. The latter is up from a forecast of 5 per cent before the war.

Economists are closely monitoring signs of wage inflation spiral, where rising workers’ compensation feeds into more persistent domestic price pressure. Hollingsworth said there has been “little evidence” so far of stronger wage growth, but he added that “it is only a matter of time.” Valentina Romei