Saudi Arabia will cut production by 500,000 barrels a day in May. Russia will extend until the end of the year the decline in its production that has been in place for several months. The United Arab Emirates, Kuwait, Iraq, Oman and Algeria also announced a decrease in production. In concrete terms, compared to previously planned, the oil supply will be cut by 1.1 million barrels a day on May 1 and by 1.6 million on July 1.
Officially, these countries are reducing production to meet the slowdown in the economy and global demand. In reality, it is primarily a political decision. Russia is using oil as a weapon against Western countries that support Ukraine. The action of Saudi Arabia and other Arab countries is a response to the United States, which has not kept its promise.
To bring down the price of oil, which climbed to over $100 a barrel last year, President Biden has put many of the country’s strategic stocks on the market while promising to fill them when the price of crude goes down. But despite oil falling to less than $70 a barrel in mid-March, the US President has decided that now is not the time to fill strategic reserves.
In exact terms, the Opec+ decision has boosted the price of crude oil because replacing this fall in supply will be challenging. While strategic reserves are now at a historic low, Biden can no longer use this weapon. So should US production be able to offset the fall of opec+ output? Large American oil tankers favour profitability over volume. And the tightening of credit conditions makes it harder for small producers to finance drilling.
The rebound in oil prices is bad news for the global economy. Expensive oil maintains inflationary pressures while weakening economic activity.
Inflation in the United States: a nuanced decline
While US inflation continues to fall, this trend is mainly linked to falling energy prices, and the erosion of purchasing power continues — nothing to reassure the Fed.
With an increase of 5.0% year-on-year in March, US inflation is at its lowest level since Spring 2021—a downward trend confirmed by the monthly figures. Compared to the previous month, the increase in the general index is now only 0.1%, food is stable, and energy continues to decline.
Indeed, these figures are mainly the result of the sharp decline in energy prices (down 6.4% compared to March 2022) because elsewhere, inflation remains strong, to the point that the underlying index is growing faster than in the past: Over one year, spending on housing increased by 8.2%. Food increased by 8.5% and transport by 13.9%. Overall, underlying inflation (excluding energy and food) rose by 5.6% year-on-year. This was higher than the 5.5% in February and, above all, higher than the general index.
This indicator of inflation remains on a generally good trend but needs to improve since prices continue to develop faster than household incomes (+4.2% over one year in March). As a result, the purchasing power of American households continues to be eroded.
This will leave uncertainty about the performance of the US economy in 2023 and the choices the US Federal Reserve will make at its next monetary policy meeting in early May.
The slowdown of the US economy
In the United States, the latest indicators indicate a slowdown in economic dynamism in March. Last month, the ISM Manufacturing Index fell to its lowest since May 2020. Now well below 50, the border between expansion and contraction of activity, the index announces an American industry in crisis. And the sharp fall in new orders does not indicate an improvement in the situation in the coming months. The decline in American manufacturing activity directly results from Federal Reserve policy. Rising interest rates are increasingly slowing the purchase of durable goods and investments.
On the other hand, the service sector is still expanding, allowing the U.S. economy to keep its head above water. However, the sector’s momentum slowed in March. If the industry continues to weaken, the scenario of a recession in the United States this year will come to the fore.
We remain confident about the ability of the US economy to overcome a possible cyclical gap. U.S. equities are essential in our portfolio. Dollar bonds are also helpful in reducing overall risk.