Oil prices rise after Saudi Arabia pledges production cut: How it will impact inflation

Oil prices are on the rise after a pledge from Saudi Arabia to cut production into 2024. Ben Laidler, eToro Global Markets Strategist and Tom Essaye, Sevens Report Research Founder and President discuss the impact of this decision upon the global energy market.

Video transcript

JULIE HYMAN: Crude oil is on the rise after Saudi Arabia says it will slash oil production by a million barrels per day starting in July. That move is expected to help stabilize the oil market with prices tumbling last month on demand concerns. And this was a surprise move, by the way, by Saudi Arabia.

We're joined by Ben Laidler, eToro global market strategist, and Tom Essaye, Sevens Report Research founder and President. And we are seeing some stabilization in oil prices, but they have pared back a little bit of their initial gain after this was first announced.

Ben, let's start with you on this move, this surprise move, by Saudi Arabia. I've heard some triple digit oil predictions sort of bandied about in the wake of this. What do you think this means for the oil patch here?

BEN LAIDLER: I think at best, you got a stabilization or a managed decline. I think the supply side has been sort of tight for a while. We've had plenty of OPEC supply cuts this year. We now have US drilling activity also sort of falling as well. The problem's never been really the supply side, it's been the demand outlook.

And we've been calling-- the market's been second guessing a recession here for sort of a year and a half. And that's just been underlying the demand-- undermining the demand outlook. And I think that's going to continue. So I think the best that they can expect here is to stabilize the price or manage the decline. I think talk of $100 oil is pie in the sky, quite frankly.

BRAD SMITH: Tom, how will the decision both by Saudi Arabia and also from what came forward from the meeting in OPEC+, how will that trickle through to US and what should the economy start to also consider as a result of the decision over the weekend?

TOM ESSAYE: Good morning, everyone. I would agree with, Ben. I don't think that this is going to materially change the price of oil. Not only is demand an issue, but also we have Russia basically pumping as much oil as they possibly can, whatever the quotas are supposed to say, to try and fund their war. And really that's why we're seeing Saudi Arabia go it alone on these production cuts, right?

Remember, it's supposed to be OPEC, and instead it's just Saudi Arabia basically cutting production. To the US, I don't see much of an impact. It's not going to really move the gauge on CPI-- headline CPI, unless we get a substantial increase in the price of oil. And even so the Fed is going to look through that as sort of a temporary disruption.

The core for the-- core issue for the US and inflation is still services inflation, right? And it's still sticky. So we have to see what happens here next week with the CPI.

JULIE HYMAN: Yes. That should definitely be an interesting number. I mean, and broadly to your point, we have been seeing some of these input costs for inflation, particularly among commodities moderate to some extent. Ben, when we look at that more complete inflation picture, yes, the services inflation has been sticky, but do you think-- do you think the disinflation narrative is still in place here?

BEN LAIDLER: Yeah, absolutely. The only bit that's not really deflationary at this point is jobs, right? Supply chains have basically completely normalized, oil prices are 40% off their highs, which is why we're seeing Saudi forced to go it alone right now, the housing markets are softened up a lot, goods prices, the goods market has softened up a lot.

We bought everything we needed over COVID, and we just don't need that incremental item right now. So the only bit that hasn't, and it's always the lighting indicator, so it shouldn't really surprise us, is the jobs market.

No, I think, you scratch the surface of that big payrolls number on Friday, and I think there's a little bit for everybody. But I think the jobs market is softening up. It's just not softening up maybe as quickly as those that are looking for faster lower inflation would ask for.

But you also touched, I think, on another important point. PPI, the costs for companies, are running at half headline inflation numbers. So companies are beginning to get their margins back and that's what has driven all the weakness in-- the weakness we've seen in corporate earnings so far has all come from lower profit margins. And I think that's the significance of these lower producer prices, which we're already seeing.

BRAD SMITH: Is there a top trade this morning, Tom, that coming off of the meeting over the weekend, investors who have been monitoring the energy sector are trying to best position themselves around any decisions that OPEC or other nations like Saudi Arabia put forward? Is there a top trade that they should be considering when they begin their day today?

TOM ESSAYE: I think the energy pack in general could look attractive. Not so much because I think I'm going to see-- that we're going to see a big jump in the price of oil, but instead because what we saw at the end of last week in the market is sort of a broadening out of the rally. And if that can continue-- basically, the reason that happened is because the markets became more confident that we're not going to see a huge economic slowdown and that maybe inflation/disinflation occurs on its own.

If that continues, then cyclical sectors are going to outperform. So a really simple way to think about this is RSP, which is the equal weight S&P 500 versus SPY. For the past couple of weeks and maybe a couple of months, or actually pretty much all year, SPY has handily outperformed RSP. We can see that flip and that would benefit the energy stock.

BRAD SMITH: All right. Gentlemen, stay with us this morning. Ben Laidler and Tom Essaye