Oil Prices Jump to 2-Month High on Middle East Concerns, Trade Optimism

Commodity

Energy

Summary:

Prices surged in afternoon trading amid reports that the State Department had ordered the departure of all nonessential personnel at the U.S. Embassy in Baghdad.

Oil prices rose as a U.S.-China trade deal and soft inflation report boosted demand expectations while concerns about political instability in the Middle East sparked fears of supply disruptions.

West Texas Intermediate futures contracts, the U.S. crude oil benchmark, rose as much as 5.2% on Wednesday to trade above $68 a barrel for the first time since April 2, when President Trump’s "Liberation Day” tariff announcement pulled prices lower.

Prices surged in afternoon trading amid reports that the State Department had ordered the departure of all nonessential personnel at the U.S. Embassy in Baghdad to address security concerns amid mounting tensions in the Middle East.

Oil prices had risen earlier in the session after the U.S. and China agreed to a trade deal that eased fears about the economic fallout of a protracted trade war between the world’s two largest economies. A soft inflation report added to Wall Street's optimism about demand.

The energy sector led stock market gainers on Wednesday. Oil companies were up, with Occidental Petroleum (OXY) gaining 2% and ConocoPhillips (COP) both finishing up more than 2%. Read Investopedia's full coverage of today's trading here.

Crude oil prices slumped to about $57 per barrel in early May, their lowest level since early 2021, after the Organization of Petroleum Exporting Countries and its allies agreed to boost production in June. Energy markets were on edge even before OPEC announced the supply increase: U.S.-China trade had effectively come to a standstill after the countries increased tariff rates on each other’s goods to more than 100%, threatening to slow global growth and weigh on oil demand.

Prices began to rebound in mid-May after the U.S. and U.K. agreed to a trade deal framework, giving Wall Street confidence that tariff rates would eventually settle below the levels announced in April. Oil's rebound picked up pace in early June when OPEC lifted its production targets by less than investors expected.

Source: Reuters

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Commodity

Energy

JERA, Japan's biggest power generator, has agreed to new supply deals for U.S. liquefied natural gas (LNG) from four projects to diversify its global portfolio away from its reliance on Australia, it said on Thursday.

JERA plans to buy up to 5.5 million metric tons per annum (mtpa) of U.S. LNG under 20-year contracts, with deliveries starting around 2030. That total includes some previously reported deals as well as newly announced agreements.

The move illustrates Japan's efforts to seek stable and flexible LNG supply to strengthen energy security and meet growing electricity demand driven by expanding data centres. The country is the world's second-largest LNG importer after China.

JERA, Japan's biggest LNG buyer, has signed a heads of agreement with Sempra Infrastructure for 1.5 mtpa from its Port Arthur LNG phase 2 project and a HOA with Cheniere Marketing for up to 1 mtpa from Corpus Christi LNG and Sabine Pass LNG.

The Japanese utility also signed a 20-year sales and purchase agreement (SPA) with U.S. LNG developer Commonwealth LNG for 1 mtpa from its Louisiana project. On Tuesday, sources familiar with the negotiations told Reuters about the deal though both companies declined to comment at the time.

The 5.5 mtpa figure also includes its deal announced on May 29 with NextDecade to buy 2 mtpa from its Rio Grande LNG project.

All four are 20-year, free-on-board contracts with no destination restrictions, although the Cheniere deal could go beyond 20 years, JERA said.

"We made these decisions because cost-competitive and flexible LNG is essential as we look towards the 2030s," JERA's Global CEO and Chair Yukio Kani told Reuters.

He added that LNG has become increasingly important amid rising power demand from data centres and the soaring costs of cleaner alternatives like hydrogen and ammonia.

"We were also aiming to secure contracts with the projects already under development and tied to the EPC (engineering, procurement, and construction) agreements before the recent surge in LNG project costs and interest rates," he said.

The announcement comes amid ongoing trade talks between Japan and the United States, though Kani stressed there was no government pressure behind the deals which he said were purely private sector decisions.

"We are rebalancing towards the global supply mix," he said, to reduce its weighting toward Australia.

After the new deals, the U.S. will supply nearly 30% of JERA's LNG mix, up from 10% now. Oceania and Asia, including Australia, currently account for more than half.

JERA, jointly owned by Tokyo Electric Power and Chubu Electric Power, already buys U.S. supply from Freeport LNG and Cameron LNG. In 2023, it signed a 20-year contract to buy 1 mtpa from Venture Global's CP2 project.

Source: Reuters

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Manuel

China–U.S. Trade War

Economic

Treasury Secretary Scott Bessent told Congress that it is "highly likely" that a pause related to steep new US tariffs on other countries will be extended for countries that are negotiating with the administration "in good faith."

"There are 18 important trading partners — we are working toward deals on those — and it is highly likely that those countries that are ... negotiating in good faith, we will roll the date forward," Bessent said during testimony before the House Ways and Means Committee.

On April 9, after President Trump's announcement of steep new tariffs across global trading partners roiled markets, Trump imposed a 90-day pause on the import taxes. The US continues to negotiate new trade deals with various countries, as well as the European Union.

Earlier on Wednesday, US and China agreed to a framework and implementation plan to ease tariff and trade tensions on Tuesday. President Trump signaled his approval, saying the deal was "done" pending sign-off from him and Chinese President Xi Jinping.

Trump and other US officials indicated the deal should resolve issues between the two countries on rare earths and magnets, though reports later indicated China would only loosen restrictions on rare earth mineral exports for a six-month period. Trump also said the US will allow Chinese students in US colleges, a sticking point that had emerged in the weeks following the countries' mid-May deal in Geneva.

Trump said the US would impose a total of 55% tariffs on Chinese goods. Yahoo Finance's Ben Werschkul reports, citing a White House official, that Trump arrived at that figure by adding together an array of preexisting duties and not any new tariffs.

Meanwhile, though Trump's most sweeping tariffs continue to face legal uncertainty, on Tuesday, the president received a favorable update. A federal appeals court held a decision saying his tariffs can temporarily stay in effect. The US Court of International Trade had blocked their implementation last month, deeming the method used to enact them "unlawful."

Source: Reuters

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Political

Economic

Headline inflation was up a scant 0.1% month over month (m/m), below consensus expectations of a 0.2% m/m rise. On a yearly basis (y/y), the consumer price index rose 2.4% — very near the Federal Reserve’s ultimate target of 2% y/y price growth.

Core inflation, which removes items with volatile pricing like food and energy, was also up 0.1% m/m. In a Bloomberg survey of 73 economists, not one forecast a core reading as low as 0.1%.

Not-so-great expectations

What, in fact, did economists expect from this print?

In a note from June 5, Bank of America predicted that “tariffs should have a broader impact on the data” than in April, and expected “to see more signs of tariffs driving prices higher” in May.

Nor were they alone in this call.

Forecasts for tariff-driven price increases were practically unanimous: Economists surveyed by Reuters bet that a rise in core inflation “would be attributable to higher prices from President Donald Trump’s sweeping import duties,” and that “May would mark the start of tariff-related high inflation readings that could last through year-end.”

Indeed, low-cost retail behemoth Walmart shocked markets by announcing that it would begin raising prices in May, citing higher tariffs. “The magnitude and speed at which these prices are coming to us is somewhat unprecedented in history,” stated John David Rainey, chief financial officer at Walmart, in a mid-May interview.

While this move could be interpreted cynically as “greedflation,” in which companies hide behind an inflationary environment to justify price increases that aim to boost — rather than simply protect — margins, it is unlikely that Walmart’s price hike was so motivated. The retailer has gained market share in recent years specifically due to its status as a low-cost alternative to other big-box stores.

What was worrisome, however, was the potential cover that Walmart would give its competitors. “If Walmart is doing it, everybody else is probably going to be doing it — if not already, they will be in the future,” argued UBS economist Alan Detmeister.

May’s inflation data, then, was set to be the first real test of how consumer prices would be impacted by historically high tariffs.

“Retailers showed remarkable restraint in April,” said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets, yesterday. “May should bring the leading edge of price increases, with the maximum impact coming in June and July.”

On June 3, Chicago Fed President Austan Goolsbee warned that April’s soft inflation reading would likely be the “last vestige” of pre-tariff price data and that the impact of tariffs “would start showing up very soon.”

He who hesitates is lost

Even though Goolsbee so confidently assumed that tariffs would have an inflationary impact — thus prompting the Fed to further delay additional interest-rate cuts — the Fed as a whole is not convinced.

Minneapolis Fed President Neel Kashkari revealed that there was a “healthy debate” among Fed officials about whether to “look through” the inflationary effect of these historic tariffs, treating any related price growth as a one-time shock and therefore prioritizing economic growth by cutting rates. This view is best represented by Fed Governor Christopher Waller, who reaffirmed a path to further rate cuts in 2025 earlier this month.

Others, like Goolsbee and Kashkari, are less convinced that tariffs will only have a transitory influence on consumer prices. This camp is thus more comfortable maintaining the current “wait-and-see” approach to quantitative easing, citing the surprisingly strong labor market as justification for withholding cuts.

But there is a third alternative, albeit one that is somewhat of a dark horse in influencing future policy.

This group argues that the Fed’s response, far from raising rates to combat tariff-induced inflation or even looking through the tariffs and not adjusting current policy, should in fact be expansionary.

This third view, outlined in Javier Bianchi and Louphou Coulibaly’s working paper, “The Optimal Monetary Policy Response to Tariffs,” concedes that tariffs will lead to a substantial price increase.

The issue, however, is that consumers will fail to realise that tariffs generate revenue for the government, which (all else being equal) raises household income. Equipped with a higher income, households could largely shrug off higher prices.

Given this disconnect between how consumers would ideally respond to tariffs and how they likely will, which is by reducing consumption, Bianchi and Coulibaly argue that the Fed should be prepared to tolerate higher inflation in order to stimulate employment.

Crucially, it is not just finished goods that are impacted by tariffs; some intermediate inputs necessary for domestic manufacturing cannot be domestically sourced and so must be imported.

The real threat is that domestic production and employment would suffer if not bolstered by lower interest rates: U.S. companies are constantly expressing their unwillingness to invest in the current restrictive policy environment, making this point a no-brainer.

The authors argue that their course, under which the Fed should give more weight to maximizing employment than to stabilizing prices, is optimal. Since there have yet to be signs of broad, tariff-driven inflation, cutting interest rates sooner rather than later seems like the obvious thing for the Fed to do.

Although no cuts are expected at next week’s meeting, markets are betting that the Fed will cut in September. Prior to May’s inflation data, traders had priced in a 57% chance of such a cut. At the time of writing, this probability has jumped to 68%.

Source: Freightwaves

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Owen Li

Economic

Commerce Secretary Howard Lutnick said Wednesday that U.S. tariff levels on Chinese imports will not change from their current levels, even as a trade deal between Washington and Beijing has yet to be finalized.

Asked on CNBC’s “Money Movers” if the current U.S. tariffs on China are not going to change again, Lutnick replied, “You can definitely say that.”

President Donald Trump said in a Truth Social post Wednesday morning that U.S. duties on China will total 55% — but a White House official told CNBC soon after that that figure is not new.

Rather, it comprises the existing 30% blanket U.S. tariffs on China, plus the 25% tariffs on specific products that also were already in place, the official said.

Trump sent his all-caps post hours after Lutnick and other trade negotiators for the two economic superpowers concluded high-level talks in London.

The president said the deal is “done,” but added that it is still “subject to final approval” between himself and Chinese President Xi Jinping.

Trump said China’s tariffs on the U.S. will stay at 10%, where they have stood since both sides agreed last month to temporarily pare back retaliatory duties on each others’ goods.

That 90-day reprieve came after initial talks in Geneva, Switzerland, that yielded a tentative de-escalation on tariffs but left other key sticking points unresolved, including on key minerals known as rare earths.

Trump in Wednesday’s post also wrote that “full magnets any necessary rare earths, will be supplied, up front, by China” as a result of the London talks.

In a follow-up, he wrote, “President XI and I are going to work closely together to open up China to American Trade.”

Source:CNBC

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Adam

Economic

China–U.S. Trade War

The US and China ended two days of talks in London with the announcement of a new effort to try and move past recent flare-ups and get back to negotiations that had been planned after a gathering last month in Geneva.

Commerce Secretary Howard Lutnick described the agreement to reporters as "a framework to implement the Geneva consensus" — suggesting this gathering was about getting the "negativity out." The Chinese negotiator offered similar takeaways to Chinese state media.

The sides hinted that this week's talks will lead to a Chinese speed-up of shipments of rare earth metals critical to US and world supply chains in exchange for Washington easing some of its own export controls on things like semiconductors.

The clear focus for the moment is defusing these issues with an eye toward opening up talks on broader topics — like tariffs — later.

The deals will now be presented to US President Trump and Chinese President Xi Jinping for their reaction.

Trump offered his own reaction Wednesday morning with a social media post asserting that a deal is "done" and will include the supplying of rare earth minerals by China “up front” as well as give Chinese students access to US universities.

Trump also said, “WE ARE GETTING A TOTAL OF 55% TARIFFS.”

He arrived at that figure, according to a White House official, by adding together an array of preexisting duties and not any new tariffs. The president combined the existing 20% tariffs over illegal drugs and migration with 10% "Liberation Day" tariffs, with other sector-specific duties in place that average out to 25% but only apply to certain goods.

Outside analysts, such as the budget lab at Yale, have calculated that the effective tariff rate on China overall is more like 33%.

A variety of market observers quickly weighed in hours after Tuesday evening’s unveiling to suggest that the deal may not have a lot of meat on the bones, but at least relations are no longer moving in the wrong direction.

he talks perhaps underscored how unlikely a comprehensive trade deal is anytime soon, noted AGF Investments' Greg Valliere, "but at least relations may not worsen as talks continue throughout the summer."

Both sides promised additional talks in the weeks or months ahead, but none have yet been scheduled.

Veronique de Rugy, a professor at the Mercatus Center at George Mason University, suggested the talks continued to show China's leverage: "China is hurting, yes, but they still hold the upper hand on critical resources, and they know how to use them."

Any lessening of tensions and a freer flow of these mineral resources in China would be a significant boost to the global economy, with China holding outsized leverage in both the reserves and processing capacity of these key building blocks for everything from computers to electric vehicle batteries to medical devices.

Likewise, the US offering concessions on export controls would be a significant move after years where successive US administrations have wielded these controls — especially around the design and manufacture of semiconductors — by saying they need to be tight on China for national security reasons.

Any significant US move to relent on export controls would be "an unprecedented action," Wendy Cutler, a former senior US trade negotiator who is now at the Asia Society Policy Institute, wrote on LinkedIn.

The president did not address the export control issue in his Wednesday morning post.

But overall, Henrietta Treyz of Veda Partners described the rare earths and semiconductor talks as, perhaps for broader markets, "extraneous" to the larger issue of tariffs in the months ahead, noting "no tariffs have come off or are likely to come off in our view."

The May agreement in Geneva dropped American tariffs on Chinese goods from 145% to 30% and also slashed China's retaliatory duties from 125% to 10%.

But that pause is in effect for 90 days, leaving the US and China about two months to try and tackle those issues.

Before the talks concluded, Shehzad Qazi of the China Beige Book offered in a Yahoo Finance interview that any agreement would be a "shaky truce at best."

Terry Haines of Pangaea Policy summed things up for markets, calling this week's agreement "tiny." But Haines suggested any optimism could be short-lived, predicting an "ephemeral markets positive as its very limited scope and unfinished status sinks in."

Markets have "seen the patch-up movie many times," he added.

Source: finance.yahoo

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Economic

Some investors are questioning the amount of cash Big Tech is throwing at artificial intelligence, fueling concerns for profit margins and the risk that depreciation expenses will drag stocks down before companies can see investments pay off.

“On a cash flow basis they’ve all stagnated because they’re all collectively making massive bets on the future with all their capital,” said Jim Morrow, founder and chief executive officer at Callodine Capital Management. “We focus a lot on balance sheets and cash flows, and so for us they have lost their historical attractive cash flow dynamics. They’re just not there anymore.”

Alphabet Inc., Amazon.com Inc., Meta Platforms Inc. and Microsoft Corp. are projected to spend $311 billion on capital expenses in their current fiscal years and $337 billion in 2026, according to data compiled by Bloomberg. That includes a more than 60% increase during the first quarter from the same period a year ago. Free cash flow, meanwhile, tumbled 23% in the same period.

“There is a tsunami of depreciation coming,” said Morrow, who is steering clear of the stocks because he sees profits deteriorating without a corresponding jump in revenue.

Much of the money is going toward things like semiconductors, servers and networking equipment that are critical for artificial intelligence computing. However, this gear loses its value much faster than other depreciating assets like real estate.

Microsoft, Alphabet and Meta posted combined depreciation expenses of $15.6 billion in the first quarter, up from $11.4 billion a year ago. Add in Amazon, which has pumped more of its cash into capital spending in lieu of buybacks or dividends, and the number nearly doubles.

“People thought AI would be a monetization machine early on, but that hasn’t been the case,” said Rob Almeida, global investment strategist at MFS Investment Management. “There’s not as fast of AI uptake as people thought.”

AI Bounce

Of course, investors still have a hearty appetite for the technology giants given their dominant market positions, strong balance sheets and profit growth that, while slowing, is still beating the rest of the S&P 500. This explains the strong performance of AI stocks recently.

Since April 8, the day before President Donald Trump paused his global tariffs and turned a stock market swoon into a boom, the biggest AI exchange-traded fund, the Global X Artificial Intelligence & Technology ETF, is up 34%, while AI chipmaker Nvidia Corp. has soared 49%. Meta has gained 37%, and Microsoft has climbed 33% — all topping the S&P 500’s 21% advance and the tech-heavy Nasdaq 100 Index’s 29% bounce.

Just Tuesday, Bloomberg News reported that Meta leader Mark Zuckerberg is recruiting a secretive AI brain trust of researchers and engineers to help the company achieve “artificial general intelligence,” meaning creating a machine that can perform as well as humans at many tasks. It’s a monumental undertaking that will require a vast investment of capital. And in response Meta shares reversed Monday’s decline and rose 1.2%.

But with more and more depreciating assets being loaded on the balance sheet, the drag on the bottom line will put increased pressure on the companies to show bigger returns on the investments.

Dealing With Depreciation

This is why depreciation was a frequent theme in first-quarter earnings calls. Alphabet Chief Financial Officer Anat Ashkenazi warned that the expenses would rise throughout the year, and said management is trying to offset the non-cash costs by streamlining its businesses.

“We’re focusing on continuing to moderate the pace of compensation growth, looking at our real estate footprint, and again, the build-out and utilization of our technical infrastructure across the business,” she said on Alphabet’s April 24 earnings call.

Other companies are taking similar steps. Earlier this year, Meta Platforms extended the useful life period of certain servers and networking assets to five and a half years, from the four-to-five years it previously used. The change resulted in a roughly $695 million increase in net income, or 27 cents a share, in the first quarter, Meta said in a filing.

Microsoft did the same in 2022, increasing the useful lives of server and networking equipment to six years from four. When executives were asked on the company’s April 30 earnings call about whether increased efficiency might result in another extension, Chief Financial Officer Amy Hood said such changes hinge more on software than hardware.

“We like to have a long history before we make any of those changes,” she said. “We’re focused on getting every bit of useful life we can, of course, out of assets.”

Amazon, however, has taken the opposite approach. In February, the e-commerce and cloud computing company said the lifespan of similar equipment is growing shorter rather than longer and reduced useful life to five years from six.

To Callodine’s Morrow, the big risk is what happens if AI investments don’t lead to a dramatic growth in revenue and profitability. That kind of market shock occurred in 2022, when a contraction in profits and rising interest rates sent technology stocks plummeting and dragged the S&P 500 lower.

“If it works out it will be fine,” said Morrow. “If it doesn’t work out there’s a big earnings headwind coming.”