Goldman Sachs Analysts See Changes in Oil Market

Economic

Commodity

Summary:

The one constant with oil prices is volatility. In just the past year U.S. crude has fluctuated between $67 and $94 a barrel.

In 2024 the price has climbed 10% to $79 a barrel amid production cuts from OPEC-plus (including Russia) and stronger-than-expected global economic growth.

Crude-oil prices are important for average consumers because they determine the prices of gasoline and other fuels. The average national price for regular gasoline on Wednesday, May 29, was $3.59 a gallon, about flat with $3.58 a year earlier, according to AAA.

The U.S. Energy Information Administration forecast gas prices would average about $3.70 a gallon from April through September, similar to the year-earlier period.

“Refinery operations are a source of uncertainty for gasoline markets this summer,” the agency said.

Oil-price forecasts

Many experts expect oil prices to maintain their recent levels through year-end. An April survey of 43 economists and analysts by Reuters produced a forecast for U.S. crude oil to average $80.46 this year, up from a forecast of $78.09 in March. U.S. crude traded at $79 on Wednesday.

"Oil-market fundamentals remain tighter than expected so far" this year, Suvro Sarkar, energy-sector team leader at DBS Bank, told Reuters.

"Demand trends have been more positive than expected. And they should continue to support oil prices through inventory drawdowns, given the extended OPEC+ supply cuts.”

The OPEC production reduction may continue. In a Bloomberg survey of traders and analysts, 90% predicted OPEC will sustain the decrease when it meets June 1.

But supply could increase elsewhere, experts say. “The recent rise in the price of crude should incentivize non-OPEC+ producers to increase output,” credit-rating agency Morningstar DBRS said in a report, as quoted by The Wall Street Journal.

The agency sees crude supplies slowly rising for the rest of the year, with U.S. crude prices averaging $75 a barrel in 2024.

Goldman Sachs's take on the oil market

On the demand side, Goldman Sachs analysts see strength. They project oil demand will grow until 2034 in a report cited by Dow Jones.

The analysts boosted their outlook for 2030 demand by 2.5 million barrels per day to 108.5 million barrels per day and then to 110 million by 2034.

But slower-than-expected conversions to electric vehicles could extend that peak until 2040, they said. Gasoline demand could peak by 2028, the analysts said, but slow EV conversions could extend that date, too.

If forecasts of rising demand turn out to be true, that could mean higher gas prices for you.

Also, Goldman Sachs analysts expect jet-fuel demand to increase until 2040, buoyed by rising income growth for global consumers. That could mean higher flight prices for consumers.

Airfare prices climbed 4.1% in April from March but were down 5.8% from a year earlier, according to NerdWallet.

Goldman is enthusiastic about the refinery sector, which converts crude oil to products such as gasoline and jet fuel. Global refining utilization should exceed historical averages in 2024-2027, the analysts said.

Refinery shutdowns and possible new capacity delays should buoy refiners' profit margins, they said. The analysts recommend refiner stocks HF Sinclair (DINO) , Marathon Petroleum (MPC) and Phillips 66 (PSX) .

Source: The Street

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Cohen

Economic

The tax package, worth NZ$14.7 billion over four years, targets low and middle-income households and those with young children will benefit the most, Finance Minister Nicola Willis said Thursday in Wellington. At the same time, Treasury projections show the budget deficit will widen to NZ$13.4 billion next year and won't return to the black until 2028, a year later than previously expected.

“Our government was elected to give a fairer deal to hardworking New Zealanders and the tax package we are confirming today delivers on that promise,” Willis said. “The changes will be fully paid for with offsetting savings and revenue initiatives, meaning tax relief won't require additional borrowing and won't add to inflation pressure.”

The tax cuts are almost identical to the pledge Prime Minister Christopher Luxon's National Party campaigned on ahead of the October election, despite some expectation that they could be scaled back as the weak economy curbs revenue. The government is also slashing spending and cutting thousands of jobs in the public sector as it seeks to reduce debt and get its books back in order.

The fiscal outlook has deteriorated significantly since Treasury's half-year update in December, with the deficit in the 12 months through June this year widening to NZ$11.1 billion from the $9.3 billion previously expected. Next year's estimated shortfall is more than double the NZ$6.1 billion gap projected six months ago.

That's because Treasury expects to collect some NZ$28 billion less in tax revenue over the forecast period due to weaker economic growth and the government's tax reductions.

The economy will contract 0.2% this fiscal year on an annual average basis, Treasury now projects. That's down from 1.5% growth expected in December. The nominal size of the economy has been revised down every year through 2028.

“What has become apparent over the last six months is that the downturn started earlier, has been deeper, and is likely to last for longer than previously thought,” Willis said. Lower nominal gross domestic product “means that reducing expenses and debt as a proportion of GDP becomes more difficult,” she said.

Willis has reduced the government's operating allowance – the amount of new spending it budgets – to NZ$3.2 billion this year and to NZ$2.4 billion in each of the following three years.

Net debt is forecast to peak at 43.5% of GDP next year and is seen barely declining over the period through 2028. The government has said its goal is to get debt below 40% of GDP.

The government will borrow NZ$12 billion more over the next four years than it anticipated in December, according to bond issuance plans published by New Zealand Debt Management with today's budget.

The budget includes targeted investment in health, education and law and order, as well as new infrastructure. But the tax reductions take center stage.

They will be delivered from July 31 through lifting the income thresholds at which higher tax rates kick in, by giving tax credits to certain households and by subsidizing the costs of early childhood education.

Households with children will benefit by about NZ$40 a week on average, with some better off by about NZ$125 a week, the government said. Overall, around 1.9 million households will benefit by NZ$30 a week, it said.

“We had the choice to break our promise to New Zealanders, we chose not to do that,” Willis said.

Any further tax reductions won't be considered until the budget is back in surplus, she said.

Source: Bloomberg

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FastBull Featured

Data Interpretation

The Federal Statistical Office of Germany released May consumer price index (CPI) data on May 29:

CPI rose by 2.4% from a year earlier in May, compared to the expected 2.4% and the previous month's 2.2%.

CPI was up 0.1% from a month ago in May, lower than the expected 0.2% and the previous reading of 0.5%.

Specifically, services prices rose 3.9%, energy prices fell 1.1%, and food prices rose 0.6% year-on-year. Core inflation (excluding food and energy prices) rose 3% from a year ago.

The May CPI was up from April's 2.2% on a YoY basis, but the MoM figure was lower than April's reading. It was due to the base effect caused by cheap public transport fares in the past, which pushed prices down 12 months ago.

Germany is a major euro area member, so the CPI rise in Germany in May will also drive the euro area CPI up slightly to 2.5% from 2.4% in the previous month. Core inflation, which has been slowing since last July, is expected to be stable.

While the data won't affect the European Central Bank's (ECB) decision to cut rates in June, the German inflation data points to a real risk of price growth accelerating, at least true for a central bank setting the inflation target as 2.0%. This means that the policy path after the June rate cut will be affected. The upside risk to inflation and the gradual recovery of the euro area economy will limit the ECB's action after the June meeting.

ECB chief economist Philip R. Lane made it clear in his recent speech that there will be no back-to-back rate cuts in June and July. However, there are other ECB members having different views. For example, Bank of France Governor Villeroy said that the ECB should not rule out the possibility of a rate cut in July.

Germany's May CPI

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Cohen

Economic

Stocks

Asian stocks and bonds fell Thursday, mirroring declines in the US, after another weak sale of Treasuries reinforced concerns about the impact of higher yields.

Japanese equities led losses in the region Wednesday, with the MSCI Asia Pacific Index down to its lowest in three weeks. Futures contracts for US equities also slipped in Asian trading after the S&P 500 ended Wednesday back below 5,300, while the Nasdaq 100 had its worst day since May 1.

Treasuries steadied Thursday after falling across the curve following tepid demand in the $44 billion sale of seven-year securities. The result boosted worries that funding the US deficit will drive up yields at a time when the Federal Reserve is in no rush to cut rates. Japanese, Australian and New Zealand debt tracked the moves early Thursday.

“Asian equity markets are set to start the day on the back foot following falls on Wall Street and as the deepening rout in global bond markets sap risk appetite,” said Tony Sycamore, market analyst at IG Australia in Sydney.

Asian Stocks Track US Peers Lower as Yields Climb_1

Rising Treasury yields have driven the dollar higher, in turn hitting the Japanese and Chinese currencies this week. A gauge of dollar strength was little changed on Thursday after jumping to a two-week high in its previous session.

In Japan, the yen rallied after weakening as much as 0.3% to beyond 157.50 per dollar on Wednesday. Japan’s government was suspected to have intervened to trigger a rapid rally in the currency in late trading. The nation’s 10-year yield has added nine basis points this week amid concern the Bank of Japan will slow its bond buying.

Elsewhere in currencies, China’s onshore yuan fell to the lowest level since November on Wednesday as the central bank let it decline against a resilient dollar through a weaker daily reference rate. Meanwhile, South Africa’s rand weakened 0.3% against the dollar Thursday as the country went to polls to elect its next parliament and government.

Asian Stocks Track US Peers Lower as Yields Climb_2

Treasury 10-year yields climbed six basis points to 4.61% on Wednesday. European bonds also tumbled, sending yields to multi-month highs after inflation in Germany quickened more than expected, denting bets on a faster pace of rate cuts.

“Bond yields may be moving higher mainly due to supply of bonds and the continued massive deficit — and not because of a concern around inflation or strong economy,” said Eric Johnston at Cantor Fitzgerald.

The US economy expanded at a “slight or modest” pace across most regions since early April and consumers have pushed back against higher prices, the Fed said in its Beige Book survey of regional business contacts.

Meanwhile, Fed Chair Jerome Powell and his colleagues have stressed the need for more evidence that inflation is on a sustained path to their 2% goal before cutting the benchmark interest rate, which has been at a two-decade high since July.

In the corporate world, Salesforce Inc.’s shares slumped in extended trading after the software giant’s outlook for the current quarter missed estimates. HP Inc. reported revenue that topped estimates, including the first increase in PC sales in two years. Elsewhere, BHP Group abandoned its bid for Anglo American Plc.

In commodities, oil was steady after retreating on Wednesday, with broader risk-off sentiment offsetting heightened tensions in the Middle East before an OPEC+ supply meeting on Sunday.

Source：Bloomberg

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Remarks of Officials

According to the Federal Reserve's latest Beige Book, national economic activity continued to expand from early April to mid-May; however, conditions varied across industries and Districts. Specifically, ten Districts reported slight or modest growth, while two noted no change in activity.

Retail spending was flat to up slightly, reflecting lower discretionary spending and heightened price sensitivity among consumers. Overall outlooks grew somewhat more pessimistic amid reports of rising uncertainty and greater downside risks.

Auto sales were roughly flat, with a few Districts noting that manufacturers were offering incentives to spur sales. Travel and tourism strengthened across much of the US, boosted by increased leisure and business travel, but hospitality contacts were mixed in their outlooks for the summer season. Demand for nonfinancial services rose, and activity in transportation services was mixed. Manufacturing activity was widely characterized as flat to up.

Tight credit standards and high interest rates continued to constrain lending growth. Housing demand rose modestly, and single-family construction increased, though there were reports of rising rates impacting sales activity. In addition, conditions in the commercial real estate sector softened amid supply concerns, tight credit conditions, and elevated borrowing costs. Energy activity was largely stable, whereas agricultural reports were mixed.

In the labor market, employment rose at a slight pace overall. A majority of Districts noted better labor availability, though some shortages remained in select industries or areas. Multiple Districts said employee turnover has decreased. Hiring plans were mixed—a couple of Districts expect a continuation of modest job gains, while others noted a pullback in hiring expectations. Wage growth remained mostly moderate, though several Districts reported that wage growth was at pre-pandemic historical averages.

Prices increased at a modest pace. Most Districts noted consumers pushed back against additional price increases. As input prices rose on average, profit margins were smaller. Many Districts observed a continued increase in input costs, particularly insurance. Some Districts observed declines in manufacturing raw material costs. Price growth is expected to continue at a modest pace in the near term.

Beige Book

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Owen Li

Bond

Economic

Emerging Asia bonds are set to benefit more than their global peers from any rally in Treasuries as the region's debt enjoys tighter spreads over their US counterparts.

South Korean 10-year bonds offer a spread of around 100 basis points below similar-dated Treasuries, which is 2.1 standard deviations below the five-year average, according to analysis by Bloomberg. Calculations for Indian, Malaysian and Chinese debt also show narrow spreads while those for bonds in Hungary, Colombia, Poland and Mexico signal relatively wider spreads.

While Treasury yields have risen recently, they are still set for a decline in May as the Federal Reserve appears to have set the bar high for further rate hikes. Most policymakers in the region are waiting for the Fed to cut borrowing costs before embarking on their easing path, with slowing growth and inflation in some of these economies giving them room to act sooner.

Emerging Asia bond spreads are narrow relative to Treasuries as the region has not faced “the same level of price pressures as the US,” said Eugene Leow, a Singapore-based senior rates strategist at DBS Group Holdings. “When the Fed finally re-calibrates lower, the external constraint on EM Asia central banks should turn less binding, allowing rate cuts to be delivered if needed.”

Ten-year Treasury yields have fallen seven basis points in May, while an average of the region's debt of the same tenure has slipped by a mean of 11 basis points, according to data compiled by Bloomberg. By comparison, Europe, Middle East and Africa's (EMEA) 10-year bond yields declined by only four basis points, while Latin American notes saw a small gain.

The drop in US yields, as a proxy for the dollar cost of funding, has made investments into emerging-market assets more alluring. As a result, global funds poured $560 million into Thai bonds in May, the first foreign inflow in six months, while Indonesia bonds have seen the first net foreign inflow this year to the tune of $944 million.

Treasury yields have risen this week amid US fiscal deficit concerns, which showed up in the soft demand at the seven-year Treasury sale on Wednesday, as well as stronger US consumer confidence data.

Nonetheless, any signs of a dovish pivot by the Fed at its FOMC meeting in mid-June may allow regional policymakers to begin easing rates. April inflation in Malaysia, Indonesia, the Philippines, South Korea and Taiwan all came in below economist estimates, signaling that disinflation is becoming more widespread in the region and easing pressure on local yields.

Source: Bloomberg

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Samantha Luan

Economic

China-listed firms announced record cash dividends totalling 2.2 trillion yuan ($300 billion) for 2023 despite a fall in combined profit, official data shows. Over 100 listed companies returned money to investors for the first time.

Meanwhile, a growing number of firms are unveiling share buyback schemes to avoid being delisted or sanctioned with other penalties under tougher rules.

China's measures, designed to improve investor returns and announced in March, have triggered a solid rebound in stocks - the benchmark CSI300 index is up almost 17% from February's five-year lows.

They have also drawn comparisons with the Tokyo Stock Exchange's push for capital efficiency that drove the Nikkei to record highs.

But a Japan-style rally is unlikely as China's reforms have met with scepticism from fund managers who say it's more about rescuing the market than improving corporate governance.

Government-controlled companies, which account for roughly 30% of market capitalisation in China and Hong Kong, are under the tight grip of the ruling Chinese Communist Party, which could raise conflict of interest issues with non-state shareholders.

In Japan, firms have begun to unwind strategic shareholdings as part of ongoing reforms to be more market-oriented.

Returning money has struck a chord with investors who "have been calling for bumper dividends and more buybacks," said Yang Tingwu, fund manager at Tongheng Investment.

However, "Chinese companies have a long way to go in terms of corporate governance," he added. Under China's top securities regulator Wu Qing, listed companies are pressured to engage more with investors and improve returns.

This mimics Japan's corporate reform and South Korea's "Value Up" program, said John Pinkel, partner of New-York-based hedge fund Indus Capital, which recently added China exposure.

"The common denominator of these positions: they all have large cash positions, are buying back shares or increasing dividends, and we like their business models."

The China campaign has seen many firms arm-twisted to pay dividends.

Jason Hsu, chairman and chief investment officer of Rayliant Global Advisors, said that Japanese firms respond well to sticks and the same strategy works too in China, where regulators hope to protect retail investors.

Jilin Expressway Co and Fangda Special Steel Technlogy, for example, didn't intend to pay dividends, but changed plans to return money to investors following questioning by the Shanghai Stock Exchange.

In addition, companies including Chongqing DIMA Industry Co, SafBon Water Service and Infund Holding Co scrambled to unveil share buyback plans after warnings by stock exchanges that they could be delisted if their share prices traded at persistently low levels.

To be sure, concerns linger especially over state-owned companies (SOEs), who are tasked with social responsibilities often at odds with shareholder interests.

And while Japan's stock market revival was aided by foreign inflows, China still faces geopolitical headwinds and global fund managers remain nervous.

"When it comes to Chinese companies, as a minority Western investor, you are not top of the priority," said Sunil Krishnan, head of multi-asset funds at Aviva Investors, London.

"That is just a structural factor that Western investors have to recognise and accept." Still, as markets price in the progress investors have pocketed gains.

"The way that I look at Chinese governance is that yes, there is still a long way for the Chinese to improve and they are trying to improve it," said Chi Lo, senior markets strategist at BNP Paribas Asset Management.