OPEC +/-

 By Bas van Geffen, Senior Macro Strategist at Rabobank

Brent futures topped $115/barrel, after news broke that US President Trump rejected Iran’s proposal to reopen the Strait of Hormuz. According to CNN’s sources, Iran is expected to submit a revised proposal in the next few days. However, it is unclear why Trump would accept this new version, unless Iran is suddenly willing to make concessions on its nuclear program.

Meanwhile, Reuters reports that US intelligence agencies are studying how Iran would respond if President Trump simply declared victory – suggesting that pressure on the president to end the war quickly is building. However, the White House states that they will “not be rushed into a bad deal.” Indeed, as the Wall Street Journal reports, the President prefers “decisive victories” and told his aides to prepare for an “extended blockade.” Military options remain on the table, but Reuters’ sources note that the cost of a full-scale war is now higher than it was at the start of the ceasefire. Iran has used the time to dig out materiel that was buried in the US bombings.

In short, negotiations between the two sides remain as stuck as the ships trapped in the Persian Gulf. And odds of a military campaign that quickly breaks the stalemate appear to have lessened. So, with no end in sight for the closure of Hormuz, futures prices are closing in on physical prices.

But news that the United Arab Emirates will withdraw from OPEC as of 1 May stemmed the advance of futures prices. The Ministry of Energy says the government decided to OPECxit, as the country wants to grow its output “based on national interest” and its commitment to “meet the market’s pressing needs.” But, as our energy strategists note, this does not change anything about the near-term supply-demand balance. Only after the Iran war ends, and the Strait of Hormuz reopens can we discuss the UAE ramping up oil production.

But the UAE’s departure could have broader ramifications for both OPEC and the region. If other countries follow the example set by the Emirates, it erodes the OPEC’s cartel.

The balance of powers in the region already seems to be shifting. The announcement followed days after the UAE negotiated a dollar swap line with the US, and after Israel sent an Iron Dome system and personnel to operate the air defences to the country. And it emphasises the growing rift between the UAE and Saudi Arabia, as the UAE moves more clearly into the US camp – which includes Israel.

As gradually as financial markets seem to be pricing in the impact of the war in Iran, so quickly are consumers taking it into account. Inflation expectations have risen rapidly in the latest round of the ECB’s Consumer Expectations Survey. The sharp increase in 1-year expectations is not too surprising, but notably consumers’ expectations of inflation 3 years ahead rose equally quickly – from 2.5% to 3.0%.

That puts medium-term inflation expectations back around the highs of the Russian gas crisis, even though the relative price shock has been much more muted so far. It suggests that memories of the previous energy crisis are making consumers more wary of new price shocks. We would not consider this a de-anchoring of inflation expectations yet, but it does underscore the risk that second-round effects could take hold via wage or price setting more quickly.

This adds some pressure on the ECB to act this week already. Our base case remains a hold, but the survey suggests that the probability of a hike may be a bit higher than the 10% implied by money markets. In any case, policymakers will not be very comfortable with their decision.

Adding to that unease, Bruegel has calculated that about 80% of EU governments’ energy support measures are untargeted. The largest commitments are directed towards lowering fuel excise duties or VAT. As Bruegel notes, that is contrary to the recommendations of the European Commission and the European Central Bank. At €10.5 billion, the total amount committed to energy support measures is still small, but untargeted measures increase the risk that the energy price shock could become a broader and more persistent inflationary pressure

https://www.zerohedge.com/markets/opec