Narrative divergence in oil signals slowing economy
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Narrative divergence in oil signals slowing economy

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Maverick Lin

Maverick Lin

Asset Allocation Research Analyst, Multi-Asset Strategies and Solutions

On Monday, in response to global oil market dynamics, Saudi Arabia announced a 1 million barrel per day unilateral oil supply cut to begin in July. Combined with the surprise cuts OPEC+ implemented back in April (OPEC’s April Fools’ is No Joke as Oil Spikes), the country’s production will be pushed down to the lowest levels in years. From Saudi Arabia’s point of view, it makes perfect sense: the International Monetary Fund estimates that the country needs oil prices of ~$80.90 per barrel to balance its budget. (WTI is currently ~$72 per barrel.)

Yet the market barely reacted ― WTI rose 2% but finished the day up 0.6%. This divergence between positive news and lackluster price reaction ― combined with evidence of a consumer spending slowdown (Dollar General and Macy’s both recently cut profit estimates for 2023), falling commodities prices and tightening credit availability ― all seem to signal a slowing economy. If that’s the case, and with global inflation cooling, the Federal Reserve and other central banks may be close to finishing their hiking cycle. We think this may be an opportune time to extend interest rate duration and defensive equity positioning.

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West Texas Intermediate (WTI) crude oil is a specific grade of crude oil and one of the main three benchmarks in oil pricing, along with Brent and Dubai crude. WTI is the underlying commodity of the New York Mercantile Exchange's (NYMEX) oil futures contract and is considered a high-quality oil that is easily refined.

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