A Big Oily Mess

Well, another weekend has come and gone, and my tennis serve still sucks. While I was out trying to perfect my ball toss in the 60 degree weather (thank you weird weather patterns in the South) the financial world didn’t take a break. Nope, not even for a moment. This past weekend served up an ace right up the T. And I’m told there was a football game in which Taylor Swift was the MVP?

In case you missed it, it was OPEC (the news, not the football game). The biggest story of the weekend: OPEC decided to cut production. The oil cartel and its allies decided that higher oil prices are exactly what the world needs right now. Because why not? It’s not like inflation’s been running rampant or anything. This move could ripple across multiple asset classes, and traders everywhere are bracing for a bit of whiplash…

The Nuts and Barrels

OPEC announced they’ll be slashing oil production by 1.16 million barrels per day starting next month. Saudi Arabia, the group’s ringleader, will shoulder the bulk of the cut, but they’re not alone. Russia, the UAE, Kuwait, and a few others are jumping on the bandwagon. Officially, the reasoning is all about “market stability.” Unofficially? Well, some might say it’s a cash grab to prop up prices.

This decision is coming on the heels of oil’s recent tumble. WTI crude, the darling of U.S. benchmarks, had been hovering in the mid-$60 range — not exactly a slam dunk for oil-exporting nations. By cutting supply, OPEC is essentially saying, “Let’s make $80 a barrel great again.” As traders, we can’t blame them, but still, not cool OPEC. We’re already paying triple for our beef jerky and sofabeds and well, essentially everything; can we please get a break somewhere?

Inflation: The Monster Currently Eating the Bed

Higher oil prices feed into everything — transportation costs, manufacturing, even the price of Mario-themed Clue (Luigi did it in the pipe, with… the pipe?). And just when we thought the Fed might ease off the rate-hike pedal, this move throws a wrench (pipe?) into things.

If oil prices climb, it’ll likely reignite inflation fears. Sure, the Fed’s been signaling a slowdown in rate hikes, but let’s face it: they’ve got a hawkish streak a mile wide. If inflation creeps back up, we could see a more aggressive stance from the central bank. For bond traders, this means keeping a close eye on yields. Like the price of everything, they’ll probably be climbing.

And Equities?

Energy stocks are the obvious winners here. If oil prices surge, expect names like ExxonMobil, Chevron, and Halliburton to see a nice pop. On the flip side, higher energy costs could put pressure on consumer discretionary stocks. After all, if people are spending more at the pump, they’re spending less on, say, a new pair of Nikes or a Peloton subscription.

The tech sector, which has been enjoying a bit of popularity boost lately, might also feel some heat. Rising oil prices could nudge yields higher, and as we all know, high-growth tech stocks don’t play well with higher interest rates literally can’t do anything wrong, ever. So they will probably be fine.

Geopolitics

Let’s not forget the geopolitical angle. OPEC cutting production isn’t just about economics; it’s also a flex. The decision sends a clear message: the cartel is willing to go its own way, even if it means ruffling a few feathers in Washington. The U.S. has been pushing for lower energy prices to ease the strain on consumers, and this move feels like a direct FAFO counterpunch.

From a broader perspective, this decision could also deepen tensions between the West and OPEC members, particularly Russia. With the war in Ukraine still raging and sanctions squeezing Russia’s economy, higher oil prices are a lifeline for Moscow. Traders should keep an eye on any retaliatory measures from the U.S. or Europe. Sanctions, tariff tweaks, or even a strategic release from the SPR (Strategic Petroleum Reserve) could all come into play.

And finally some thoughts on currencies

Higher oil prices also tend to have a ripple effect on currencies. Historically, the U.S. dollar strengthens when oil prices rise. Oil is priced in dollars, and higher prices mean more demand for dollars. BUT, a stronger dollar can weigh on emerging markets, especially those that rely on imported oil. Damned if you do, damned if you don’t. So if you’re trading EM currencies, make sure you’re staying nimble.

What to do, what to do?

So, how to deal with productions cuts?

1. Energy Stocks: this is their time to shine.
2. Bonds: If the 10-year starts climbing, it might be time to adjust your positions accordingly.
3. Tech:if yields do start spiking, it becomes more expensive to borrow, and lots of high tech relies heavily on borrowing to fuel growth, so a little lower (or even, dare I say, short) exposure to tech might be in order.
4. Currencies: Keep an eye on the dollar index and major oil-importing nations’ currencies like the Indian rupee and Turkish lira.
5. Geopolitics: Stay nimble on the political front. Trump did announce a production termination on the penny, so that’s something?

Closing Thoughts

There you have it: an oily mess that is going to move markets around in unpredictable ways. It seems pettiness is a virtue these days, so perhaps the cuts are just penance for the Chiefs losing this weekend.I say we send Taylor Swift as an ambassador to clean this (literal) mess up. Until tomorrow, when everyone’s forgotten already!