Surging Global Oil Prices Push U.S. Rate Cuts Further Out, With UAE Output Expansion and Saudi Price Cuts Emerging as Key Variables

Gasoline Price Spike and Collapse in Consumer Sentiment Fuel Inflation Fears
Resilient Employment and Consumption Undermine Fed Rate-Cut Expectations
Market Focus Shifts to UAE Output Card and Saudi OSP Cuts

U.S. inflation is again coming under steep upward pressure, rapidly eroding expectations for interest rate cuts by the Federal Reserve. A surge in global oil prices triggered by the war in the Middle East, a resilient labor market and early signs of slowing consumption are converging at once, prompting markets to price in the possibility of higher rates for longer. Still, if the United Arab Emirates’ move to expand output and Saudi Arabia’s price-cutting stance continue, global oil price gains could stabilize, easing some of the pressure on inflation.

April CPI Seen Jumping in Aftermath of Iran War

Bloomberg reported on the 10th local time that the U.S. consumer price index due for release soon is increasingly likely to exceed market expectations. According to the median estimate of economists compiled by Bloomberg, U.S. CPI for last month is expected to rise 0.6% from the previous month. That would remain elevated following March, which marked the largest monthly increase since 2022. Oil prices have also continued their ascent. In particular, since U.S. and Israeli military operations against Iran began in February, the average U.S. gasoline price has surged by more than 50%, climbing above $4.50 per gallon.

Anxiety among U.S. consumers is also growing. The consumer sentiment index released by the University of Michigan the previous day fell to a record low. Deteriorating household finances and the burden of high prices were cited as the main causes. Consumer goods companies including Kraft Heinz and McDonald’s are also voicing concern over the possibility of weakening consumption among lower-income groups. Bloomberg said companies are increasingly worried about pressure on consumers’ budgets.

U.S. retail sales data scheduled for release on the 14th are considered a key indicator of how the gasoline price surge has affected consumption. Excluding auto sales and gasoline station receipts, U.S. retail sales for last month are expected to rise 0.4% from the previous month. Growth is expected to continue, but at a somewhat slower pace than the previous two months, each of which posted 0.6% increases.

Trends in the U.S. auto market also symbolically underscore concerns over prolonged inflation. Recent sales of hybrid vehicles in the U.S. jumped 37% from a year earlier. That is more than double the 15% growth rate of the overall U.S. auto market over the same period. The surge reflects consumers beginning to prioritize fuel efficiency amid sharply higher gasoline prices, and also suggests U.S. consumers have already started to accept the possibility of prolonged high oil prices as a real variable. The growing fuel-cost burden is translating into a shift in consumption patterns themselves.

Resilient Labor Market Weakens Case for Rate Cuts

Market participants say that if energy-driven inflation again stimulates services prices, the Fed’s rationale for monetary easing could itself weaken. Market sentiment is in fact changing quickly. According to CME FedWatch, the probability of rate cuts this year has recently fallen sharply, while long-term Treasury yields are again facing upward pressure. The U.S. 30-year Treasury yield recently topped 5%, stoking market anxiety. This indicates investors have begun pricing in both renewed inflation acceleration and a prolonged high-rate regime.

The labor market is also maintaining stronger momentum than expected. In its April employment report released on the 8th, the U.S. Labor Department said nonfarm payrolls increased by 115,000 from the previous month. That far exceeded Wall Street’s forecast of a 55,000 gain. The unemployment rate was unchanged from the previous month at 4.3%. March job growth was revised to 185,000. That was 7,000 higher than the initially reported 178,000. At the time, the market had expected a 59,000 increase, but the actual gain was far larger. U.S. employment temporarily slowed in February due to a major healthcare strike, then rebounded in March as medical workers returned.

Market experts are focusing on the fact that U.S. corporate hiring remained more resilient than expected despite the surge in global oil prices caused by the Middle East war. With the S&P 500 and other major U.S. stock indexes recently setting fresh record highs and consumption indicators maintaining relatively stable trends, companies appear to have opted to retain existing workers and expand hiring rather than cut jobs. Wage pressure also remains firm. With consumption and the labor market holding up simultaneously despite concerns over an economic slowdown, the Fed’s case for a premature pivot to easing is weakening further.

The Fed has recently kept its benchmark rate unchanged amid concern that energy price increases stemming from the Middle East war could stoke inflation. Markets had expected a rate cut this year on the possibility of an economic slowdown, but stronger-than-expected employment has fueled expectations that the Fed will refrain from considering rate cuts for the time being. Boston Federal Reserve President Susan Collins told Bloomberg in an interview on the 7th, “Rates are likely to remain on hold for longer, and additional easing could be pushed further out,” adding that “under certain circumstances, rate hikes may also have to be seriously considered.”

Saudi OSP Cuts and UAE Output Pressure Raise Prospect of Oil Price Inflection Point

At the same time, the market is also watching the possibility of another inflection point. That is because the UAE has begun publicly signaling its intention to expand crude production after withdrawing from the Organization of the Petroleum Exporting Countries and the broader OPEC+ alliance. The UAE’s move is the result of accumulated frustration erupting amid war. Despite having production capacity of 4.85 million barrels per day, the UAE had been constrained by OPEC+ quotas to around 3.6 million barrels. By contrast, repeated quota violations by Iraq and Russia had effectively been tolerated. Against this backdrop, Gulf allies were powerless as Iran struck the UAE mainland, and with exports blocked while the country remained bound by quotas, Abu Dhabi moved onto an independent path.

The UAE says it will pursue an aggressive output expansion strategy aimed at increasing market share. At the time of announcing its withdrawal, the UAE said it would “gradually and prudently expand production in line with demand and market conditions.” This is a factor that could increase downward pressure on oil prices over the long term. If oil prices fall, transportation and energy cost burdens would ease, creating downward pressure on overall prices.

Jan von Gerich, chief analyst at Finland’s Nordea, told Reuters, “The UAE wants to produce more oil. Therefore, this move will be bearish for oil prices,” adding, “Once the war ends, OPEC will no longer be able to control prices in the same way as before.” Ajay Parmar, energy and refining director at global research firm ICIS, also said, “Given that the UAE has disagreed with OPEC’s overall policy for quite some time, this decision is not surprising, but it will have a significant long-term impact on oil prices.”

A strategic shift by Saudi Arabia, the largest oil producer, is also expected to apply downward pressure on oil prices. In response to the UAE’s independent course, Saudi state oil company Aramco recently set the official selling price, or OSP, for June-loading Arab Light, its flagship crude grade sold to Asia, at $15.5 per barrel, $4 lower than the May-loading price. OSP refers to the premium or discount that an oil-producing country applies to benchmark crude prices by region. Aramco sets its selling price by adding or subtracting the OSP from the average price of Dubai and Oman crude, the benchmark grades. A June OSP of $15.5 means the crude will be sold by adding $15.5 to the June average price of Dubai and Oman crude.

Saudi Arabia had raised the May-loading Arab Light OSP early last month to a record-high $19.5 after the U.S.-Iran war blocked the Strait of Hormuz and disrupted oil supply. Aramco’s OSP for crude exports to Asia had remained in the $0 range through March this year, but surged vertically to $2.5 in April and $19.5 in May. Saudi Arabia is currently exporting some crude through a pipeline connected to the Red Sea port of Yanbu, located on the opposite side of the Strait of Hormuz. After the war blocked the strait and disrupted oil exports, Saudi Arabia sharply raised the May OSP, but decided to lower it slightly again in June. If oil prices enter a downward stabilization path, price indicators could materially improve and provide the Fed with a rationale for rate cuts. Conversely, if output competition among oil-producing countries intensifies, easing inflation pressure and market expectations could again shift rapidly.