Oil: OPEC output cut sees counter surprise in weak U.S. manufacturing

By Barani Krishnan

Investing.com — OPEC+ appears to have hit bull's-eye with its skilfully orchestrated move to recapture $80 and above for a barrel. The oil cartel, however, isn't the only one capable of delivering a surprise: U.S. factories are too, with a weaker-than-expected manufacturing report for March.

As crude prices posted their the largest one day gain in a year on Monday, the so-called ISM manufacturing report countered OPEC+'s surprise production cut that triggered inflation jitters. The preliminary ISM reading for last month came in at 46.3 versus a forecast 47.5 and the February reading of 47.7.

"This is the fifth month in row [where the reading is] below 50 and [it is at the] lowest since the pandemic," economist Adam Button said in a comment on the ForexLive forum.

The S&P 500 index initially opened higher, led by the energy sector, healthcare, and consumer staples as traders rushed to buy anything energy and defensive. But shortly thereafter, Wall Street gave back those gains as traders and analysts weren't sure how much higher crude prices were going, although they seemed growingly confident of one thing — that the economy was weakening.

"Wall Street was trying to find its footing as well after a weaker than expected U.S. manufacturing report countered the oil cartel’s surprise production cut that triggered inflation jitters," said Ed Moya, analyst at online trading platform OANDA.

He noted that U.S. Treasury yields gave up all their OPEC+-inspired output cut gains after factory activity plunged. Yields on the 10-Year Treasury note fell 6.7 basis points to 3.4%.

New York-traded West Texas Intermediate, or WTI, crude settled Monday’s trade at $80.42, up $4.75, or 6.3%, after a session high of $81.58. Since hitting 15-month lows of $64.12 on March 20, the U.S. crude benchmark has gained 25% — more than making up for the 13% weekly loss from three weeks ago.

Technically, WTI could be looking at a next target of just under $84, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com. "Hereon, sustainability above $81 and a break above $81.60 will open the way for the next leg higher targeting $82.50, followed by $83.75."

Brent crude settled at $84.93, up $5.04, or 6.3% after peaking at $86.44 for the session. Brent hit an intraday low of $70.06 on March 20.

Beyond Monday's oil price spike, some traders and analysts were already looking at what the Federal Reserve would do in terms of rate hikes to counter new inflation pressure almost certain from the now OPEC-inflated oil price.

Investing.com Fed Rate Monitor Tool has assigned a 60% probability of the Fed raising another quarter point in rates in May — up from 40% the previous week — to bring them to a peak of 5.25%.

Until the OPEC+ hike, some had actually been leaning towards a Fed rate cut by the year-end to lift the economy despite the central bank saying no loosening was on its horizon till it got headline inflation now at 6% a year to return to 2% or so.

Now, they can forget rate cuts altogether if oil starts creeping higher toward $90 per barrel in coming months.

"The economy is recession bound as the consumer is clearly weakening, lending is about to get ugly, energy cost uncertainty will remain elevated for a while, and monetary policy is finally restrictive and about to break parts of the economy," said Moya.