Inflation surge to keep pressure on ECB to cut stimulus

MAY 25 is getting closer. It is the date when the Organization of the Petroleum Exporting Countries ( OPEC) will decide on whether it wants to adhere to the current production cuts agreed last November. Then OPEC agreed to reduce production by 1.2 million barrels per day ( bpd).

Non- OPEC countries, led by Russia, agreed to take a further 600,000 bpd out of production. OPEC compliance was well above 90 percent owing to over- compliance by Saudi Arabia and Kuwait and the persuasive powers of OPEC Secretary- General Mohammed Sanusi Barkindo.

Since the deal, the oil price has hovered in the $ 50 to $ 55 range with spikes above and below. OPEC is slowly achieving its goal. But the production cuts failed to bite as speedily as was hoped for.

The dark horse was the US shale oil sector: No one knew how quickly shale production would be ramping up once prices were on the rise again.

Shale oil is relatively expensive to produce but the sector had become leaner, meaner and more efficient.

Ownership structures had also changed: Many of the highly leveraged small shale producers went out of business when the oil price fell below $ 40.

Their properties were snapped up by established players such as Exxon and Chevron. Indeed, around one out of five barrels currently lifted by Exxon is shale oil.

The post- OPEC deal price scenario also brought more capital into the US shale oil space: During the first quarter of 2017 private equity funds alone invested $ 19.6 billion in the sector. BRUSSELS/FRANKFURT: Inflation surged and growth continued to accelerate in the euro zone, a plethora of indicators showed on Friday, keeping pressure on the European Central Bank (ECB) to start dialing back its lavish stimulus measures as early as June.

Underlying inflation — the price indicator most watched by the ECB — blew past expectations to hit a three-year high. Household lending rose to its best rate since the global financial crisis while a measure of money in circulation, an indicator of coming economic activity, also jumped, suggesting that overall growth may be stronger than expected.

Still, the inflation figures were influenced by one-off factors — including Easter spending — so the ECB will probably maintain its plan to move only in increments and taking only the smallest of steps in June.

The ECB kept its ultra-easy policy stance steady on Thursday, even leaving the door open to more easing, arguing that underlying inflation is not showing any signs of a convincing upward trend, raising the risk that a premature exit would unravel its work.

While markets expect the ECB to tone down its language in June, removing its bias for further easing, ECB President Mario Draghi gave no hint of such moves on Thursday, only venturing to say that economic risks have receded.

Conservative policymakers, long opposed to the ECB’s stimulus, have warned that generous asset buys risk overheating the economy, could inflate asset bubbles and may push up inflation too quickly.

Confounding expectations, core inflation, or prices excluding food and energy, increased by 1.2 percent this month, higher than any analysts in a Reuters poll had predicted. While some of the rise may be due to pricing around Easter, the rate is the highest since the summer of 2013.

Earlier this month, Saudi Energy Minister Khalid Al-Falih confirmed that an extension of the agreement was likely.

The precise shape of any agreement — especially the non-OPEC participation — is still unknown. There has, however, been a series of behind-the-scenes negotiations among OPEC members as well as with their non-OPEC counterparts.

It is true that OPEC, the International Energy Agency (IEA) and the US Energy Information Administration (EIA) predict that oil markets will come into balance within the second or third quarter of 2017 and that the historically high oil inventories will then be reduced — gradually and over time.

It is also true that the IEA predicts global oil demand to grow by 1.3 million bpd in 2017, as opposed to a projected supply increase by a meager 485,000 bpd. This explains why several analysts foresee an oil-price hike to $65 by the end of the year.

You could argue that the markets would eventually reach a balance with or without an extension of the OPEC deal. However, markets are reactive by nature, prone to psychological influences and largely events-driven. This is why the deal matters.

A failure to renew the deal might send the oil price in a tailspin. OPEC ministers and oil producers are all too aware of these market idiosyncrasies, which is why Barkindo spends time communicating with and trying to understand Wall Street.

Overall inflation, meanwhile, rose to 1.9 percent in April from 1.5 percent, essentially hitting the ECB’s own target of price growth just below 2 percent.

“In May, the inflation rate will no longer be affected by the Easter holiday (so) core inflation should then drop again to 0.9 percent,” Commerzbank said.

“The inflation rate as a whole will also fall back to 1.5,” Commerzbank predicted.

The euro jumped over a half a percent on the data with investors pricing in a more hawkish stance from the ECB at its next meeting.

Though no actual tightening is seen for months to come, the ECB could remove all or some of its references to more easing, arguing that risks were balanced. It is then seen deciding in September, at the earliest, whether to extend its asset-buying scheme beyond this year.

“The ECB will not read too much into these Cornelia Meyer is a business consultant, macro-economist and energy expert. She can be reached on Twitter @MeyerResources (inflation) data. While we still see it tapering its asset purchases next year, the process will be fairly slow and interest rate hikes are a long way off,” Capital Economics Chief European Economist Jennifer McKeown said.

Fighting ultra-low inflation into the fifth straight year, the ECB has cut rates deep into negative territory and plans to buy €2.3 trillion worth of bonds by the end of the year, all in the hope of boosting growth, which would then generate inflation.

Although prices have come up quickly this year, the ECB has warned that much of this is due one-off energy price rises and inflation will then dip back.

Indeed, the ECB’s own survey of professional forecasters put core inflation at just 1.1 percent this year, predicting only incremental rises for years to come.