The rise in oil renews upward pressure on inflation

$WTI Crude Oil - main 2305(CLmain)$ $Micro WTI Crude Oil - main 2305(MCLmain)$ $United States Brent Oil Fund LP(BNO)$ $E-mini Nasdaq 100 - main 2306(NQmain)$

The early April spike in oil prices following the surprise OPEC+ production cut. The rise in oil renews upward pressure on inflation at a time when Asia central banks are at, or near, the end of tightening cycles. It also comes as the latest PMI data across north Asia shows ongoing weakness in manufacturing and little boost yet to the rest of Asia from the China reopening.

Fuel components in CPI have moved lower

Oil prices back above $80/b risks delaying the disinflation starting in Asia and elsewhere. Fuel components in CPI have generally moved lower in recent months. And while the CPI weight is higher for food, the first order impact from energy is still meaningful.

With oil accounting for between 30% of the import bill in India, another leg higher in oil will also delay the expected improvement in trade balances across the region.

OPEC+’s decision to cut 1.2mnb/d from oil production from May until year end is equivalent to around 1% of global supply. The ‘precautionary’ cut came in response to concerns over weaker demand growth as banking sector stress in the US leads to tighter credit conditions and lower growth. US indecision around refilling the SPR this year was an additional factor.

The latest spike has led to upward revisions by some, but not all, major oil forecasters. Current underproduction relative to the existing quota announced last year, rising inventories and resilient Russian output are all reasons for the currently muted forecast revisions.

China has seen the import bill drop slightly

For Asia’s oil importers, the runup in oil prices from mid-2020 to mid-2022 was very quickly seen in the import bill. And despite declining oil prices since H2 2022, only in India is there now a visible shift down in the oil import bill (on a rolling 12m basis) with, again, the shift to cheaper Russian imports a factor.

Korea’s remains near the 2013 highs, while for China the start of the year has seen the import bill drop slightly after reaching an all-time high in December. Thailand’s fuel bill, meanwhile, is only just off the early 2014 highs.

Overall, Our baseline remains for recent C/A weakness to improve in the coming months with export weakness starting to bottom out and the benefits from the China reopening gradually spilling over to the rest of the region. Higher oil prices are a meaningful risk to this view, particularly when driven by reduced supply rather than stronger global demand, but for now we remain cautiously constructive.

https://www.sgx.com/research-education/market-updates/20230405-sgx-asia-currencies-insights