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OPEC's decision will trigger a recession in the US?

OPEC's decision will trigger a recession in the US?

created Lukasz KlufczynskiApril 5 2023

Saudi Arabia and some other countries the OPEC cartel stunned the world on Sunday by announcing significant cuts in crude oil production - more than a million barrels a day in total - starting in May. The decision was unexpected as it did not appear as a typical OPEC+ negotiated deal reached at a regularly scheduled meeting. Instead, it was picked up by Saudi Arabia and other manufacturers, including the United Arab Emirates and Iraq, and announced without notice. Reducing production oil means less supply on the market, which of course causes prices to rise.

High oil prices, a big problem for the Fed

Persistently higher oil prices, in turn, are a real headache for the Fed. This further complicates the landscape of reduced but still far too high inflation. Saudi Arabia has made it clear that it will follow the path of keeping prices higher, ready to turn the tap off at a whim. President Biden's visit to Saudi Arabia seems to have done little. President Biden made a high-profile trip to Saudi Arabia last year to ask for an increase in oil production to bring down high gasoline prices. He was refused. This means that the price of oil is beyond the control of the US administration. Regardless of previous good relationships.

Saudi Arabia is getting closer to China, both economically (including through oil transactions) and diplomatically. The Kingdom of Saudi Arabia now sees the US as just one of several partners, while relations with China are becoming increasingly important. The Fed also knows that any sustained higher oil price, even if it does not approach the levels of the previous crisis, will nevertheless have an immediate and profound impact on prices in most service, manufacturing and retail sectors.

This latest rise in oil prices, while modest compared to the earlier crisis (oil prices as high as $140 a barrel contributed to the 2008 economic crisis), could have an equally serious impact on the overall level of inflation. This is by no means a minor problem, as this is a clear Saudi political stance that will affect US inflation for some time to come. As a result, the Fed will aggressively raise interest rates even as the economy continues to slow. The nightmare scenario of a recession accompanied by Fed rate hikes is now very real. Especially since oil shocks have been one of the most common catalysts for US economic recessions over the last 50 years.

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About the Author
Lukasz Klufczynski
Chief Analyst of InstaForex Polska, with the Forex market and CFD contracts since 2012. He gained his knowledge in many financial institutions, such as banks and brokerage houses. He conducts webinars in the field of technical and fundamental analysis, investment psychology and MT4/MT5 platform support. He is also the author of many expert articles and market commentaries. In his trading, he puts emphasis on fundamental elements, relying on technical analysis.