That Opec+ cut you ignored? It’s a bigger deal than the bank runs

Over on premium FT, the Unhedged team is seeking to rationalise Monday’s calm reaction to a politically charged Opec+ production cut:

Why the indifference? Once again, it looks to us like the soft landing scenario is exercising a hypnotic effect on the market. If you think there is a real threat the economy will keep running too hot, the additional inflationary effects of high oil prices are an unwelcome additional risk. If you think the central forecast is for demand softening enough to bring down inflation, then sustained higher oil prices don’t seem that much of a threat.

Meanwhile, here on gratuitous FT, we prefer this kind of take:

Despite the credit market’s muted reaction to Opec’s price cuts, we think this could be a bigger medium-term challenge for credit than the banking crisis.

That’s Société Générale’s European credit desk, where faith in the Goldilocks inflation story is running low.

The first problem SG highlights is that Opec+’s targeting of $90 a barrel (as per remarks from the Nigerian Minister of State for Petroleum Resources) is a very big ask. It’s effectively a return to levels last seen in the first months after Russia’s invasion of Ukraine:

Higher oil prices don’t necessarily mean higher gas prices in Europe. The correlation over the past year is probably not that instructive, having been distorted by supply embargoes and storage bottlenecks. But the pattern between oil and gas more recently has fallen into line with the historical norm. Back to SocGen:

This creates two challenges for credit. First, higher energy prices will increase pressure on the central banks to hike interest rates. Our economists still see European key rates peaking at 4%. For the moment, credit spreads and peak key rate expectations are negative, but as Chart 2 shows, these correlations are very unstable. If they turn positive again, we believe higher energy prices may well drive spreads wider

Second, higher energy prices are set to weigh on corporate margins and results. So far, not even higher wages have had an impact on margins, which in 4Q22 remained near cyclical highs. However, the 1Q earnings season is only two weeks away in the US, and we are still looking to see whether costs are beginning to outpace output prices.

More broadly, we continue to believe that the next real credit crisis will be a non-financial rather than a financial one. For this reason, we think the OPEC agreement is likely to prove more of a long-term concern for the credit markets than the banking crisis.