Saudi Arabia's Solo Play Shows Mess of Oil Market Contradictions

Commodity

Summary:

Saudi Arabia's decision to deepen its crude oil production cuts, without matching contributions from its allies, underscores how the market is being skewed by a series of contradictory influences.

The world's biggest oil exporter said it will cut about 1 million barrels per day (bpd) in July, even though the rest of the OPEC+ group decided against any further joint action at its meeting in Vienna on Sunday.

It had been widely expected that OPEC+, which consists of the Organization of the Petroleum Exporting Countries and allies including Russia, would stand pat on output cuts at its weekend talks.

What was a surprise was Saudi Energy Minister Prince Abdulaziz bin Salman's revelation at a news conference that the kingdom would trim its production from about 10 million bpd in May to about 9 million bpd in July.

"We wanted to ice the cake. We always want to add suspense. We don't want people to try to predict what we do ... This market needs stabilisation," the minister said.

These comments represent just one of the contradictions in the current oil market.

The desire for a stable oil market is extremely difficult to reconcile with being unpredictable.

The very nature of being unpredictable detracts from stability, with market participants having to adjust to Saudi "surprises", or even the threat that one of the global oil market's key players is effectively a rogue actor.

If the aim of OPEC+ is stability, as opposed to defending a price level, then being unpredictable is probably the wrong way of achieving the goal.

The unexpected 1.16 million bpd supply cut OPEC+ agreed to at its April 2 meeting is an example of unpredictability undermining stability.

That move led to global benchmark Brent futures jumping as much as 8.4% higher when trading resumed, although the price only took a few weeks to slip back below the levels prior to the April 2 meeting.

The latest Saudi surprise also sent Brent higher, with the front-month contract gaining as much as 3.4% to $78.73 a barrel in early Asian trade on Monday.

But the risk is that the increase isn't sustained, largely as a result of another oil market contradiction.

Saudi Arabia's unilateral move to cut its output in July is a tacit admission that global oil demand isn't as strong as most analysts and groups such as the International Energy Agency (IEA) have been forecasting.

If demand was indeed as robust as had been predicted, the price of Brent would be able to hold above $75 a barrel with ease, and would likely be biased towards eyeing the $100 level predicted by some analysts.

Instead, Brent keeps slipping towards the $70 level, and it takes extraordinary actions, such as the Saudi solo cut, to keep a positive price bias going.

In effect, the oil market is still operating under the view that demand may be struggling a little currently, but will come roaring back in the second half of the year.

Second Half Optimism

Much of this optimism is built around expectations of sharply higher fuel consumption in China, the world's biggest oil importer, and to a lesser extent strong demand in India and other developing Asian nations.

The one factor that tends be ignored by the oil market is the role of prices and inventories in shaping Asia's crude oil import volumes.

China has shown in the past that if refiners believe that prices are rising too fast and too high, they will trim imports and turn to their plentiful stockpiles.

They will also seek out the cheapest global crudes available, and they are already doing so by buying as much Russian, Iranian and Venezuelan oil as possible.

It's another contradiction for the oil market to resolve as those three exporters are all under some form of Western sanctions.

This means effectively their oil is disconnected from the pricing of the rest of freely available and tradable crude grades.

A further contradiction is the possibility that even as Saudi Arabia cuts output in a move largely viewed as more about boosting prices than achieving stability, the state-controlled exporter Saudi Aramco will actually be cutting its prices.

Aramco releases its official selling prices (OSPs) around the fifth of each month, and a Reuters survey found that Asian refiners are expecting a cut of about $1 a barrel to the benchmark Arab Light grade for July-loading cargoes.

While output cuts are largely a political decision driven by the energy ministry, the OSP levels reflect Aramco's view of actual physical market conditions.

If the OSPs are trimmed for July, it adds to the view that demand is not living up to the bullish expectations that OPEC, the IEA and others are still espousing.

It may well be the case that the second half of this year sees a huge pick-up in crude oil demand.

But the contradiction that will have to be overcome is China's economy will need to shake off its so far lethargic recovery, and the rest of the global economy will somehow avoid the recession that most current indicators are pointing towards.

Source: Reuters

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FastBull Featured

Daily News

[Quick Facts]

1. OPEC and non-OPEC oil-producing countries reach an agreement on oil output cuts.

2. The Fed may raise rates by 50bps in July if no rate hikes this month.

3. Non-farm payrolls in May show the labor market remains strong.

4. U.S. debt crisis comes to an end.

[News Details]

OPEC and non-OPEC oil-producing countries reach an agreement on oil output cuts

OPEC and non-OPEC oil-producing countries held a meeting in Vienna on June 3-4, local time, reaching an agreement on oil output cuts after difficult talks. The oil output cut agreement already reached between OPEC and non-OPEC oil producers in 2023 will be extended to the end of the year, according to the statement issued after the meeting. Those countries agreed that OPEC and non-OPEC oil producers would adjust their daily crude oil production to 40.463 million barrels per day (bpd) from January 1, 2024, to December 31, 2024, which is a downward adjustment of about 1.4 million bpd compared with the current production.

The Fed may raise rates by 50bps in July if no rate hikes this month

Lawrence H. Summers, former U.S. Treasury Secretary, said the Federal Reserve should be open to raising its benchmark interest rate by 50 basis points in July if the central bank pauses its round of policy tightening this month. The overheated economy is once again the main risk the Fed needs to watch out for. Summers said the employment data in May released last Friday was generally strong. While the unemployment rate jumped to 3.7% from 3.4% in April, data from the household survey from which the jobless figures are drawn can be noisy, especially in May when schools let out.

Non-farm payrolls in May show labor market remains strong

The U.S. non-farm payrolls added 339,000 jobs in May, significantly exceeding market expectations, indicating that demand in the job market remains strong and that the marginal slowdown did not ultimately lead to a cooling of demand. Continued job growth shows that the market remains resilient.

Overall, it was a strong non-farm report on jobs. While the labor force, unemployment, and illegal immigration increased, the number of newly unemployed people decreased. It suggests that most of the newly unemployed people got jobs, so the unemployment rate was not driven up. The number of the re-unemployed (the unemployed who have worked before and who can be easily replaced) increased. This depends on how tough the policy is on illegal immigration. Perhaps the supply side will continue to improve, but this one-legged approach can not fully address the current imbalance in the job market.

U.S. debt crisis comes to an end

U.S. President Joe Biden signed a bill on the federal government's debt ceiling and budget on June 3, local time, making it official and temporarily preventing the U.S. government from falling into debt default. The bill suspends the debt ceiling until the beginning of 2025 and limits spending in 2024 and 2025. It was the 103rd adjustment of the debt ceiling since the end of World War II.

Biden's signing of the bill gives the Treasury permission to resume new debt issuance after a hiatus of several months, allowing the Treasury to resume its cash in hand to a more normal level. It's a replenishment process that could involve well over $1 trillion in new debt issuance and could have unintended consequences. For example: draining liquidity from the banking sector, raising short-term financing rates, and tightening the economy. At the same time, many economists believe the U.S. economy is headed for recession.

[Focus of the Day]

UTC+8 22:00 U.S. Factory Orders MoM (Apr)

UTC+8 22:00 U.S. ISM Non-Manufacturing PMI (May)

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Warren Takunda

Traders' Opinions

In a recent statement, Israeli Prime Minister Benjamin Netanyahu expressed strong condemnation towards Iran, accusing the nation of deceiving the International Atomic Energy Agency (IAEA) regarding its nuclear enrichment activities. Netanyahu emphasized that the agency's acceptance of Iran's explanations represented a significant setback and tarnished its credibility.

According to Netanyahu, Israel had previously disclosed evidence five years ago that unequivocally demonstrated Iran's nuclear program was primarily intended for military purposes rather than civilian use. The prime minister's remarks suggest a growing frustration with the international community's response to Iran's nuclear ambitions.

Netanyahu's concerns were fueled by recent developments, specifically the IAEA inspectors' discovery of uranium particles enriched to a startling 84% level of purity. Such enrichment levels approach the threshold required for the production of nuclear weapons. Despite these alarming findings, the agency seemingly accepted Iran's explanation regarding the presence of highly enriched uranium particles.

The Israeli prime minister's criticism of the IAEA stems from his belief that the agency's capitulation to Iranian pressure undermines its mission to maintain international peace and security by preventing the proliferation of nuclear weapons. Netanyahu referred to this episode as a "black stain" on the conduct of the IAEA.

The Israeli government has consistently maintained a firm stance against Iran's nuclear ambitions, expressing deep concern about the potential regional and global implications. Netanyahu's recent accusations, coupled with the IAEA's reported acceptance of Iran's explanation, could further escalate tensions between Israel and Iran.

It remains to be seen how the international community will respond to Netanyahu's allegations and whether they will trigger a reevaluation of the IAEA's approach to Iran's nuclear program. As the situation unfolds, global financial markets and geopolitical stability may be influenced by the outcome of these developments.

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Damon

Economic

Asian markets are set for a strong start on Monday, extending last week's upward momentum and rising risk appetite on growing hopes the U.S. economy is headed for a 'soft landing' after Congress's approval last week of a debt ceiling deal that averts U.S. default.

Regional and global markets on Friday chalked up solid gains and volatility measures slumped after the release of forecast-smashing U.S. jobs figures. It looks like the 'sell in May and go away' maxim won't apply this year - investors are bullish and they are buying.

Some of the moves in major regional stock markets last week are worth noting: the MSCI Asia ex-Japan index on Friday rose more than 2%, its best day in five months; Japan's Nikkei 225 - at a 33-year high - last week rose for an eighth straight week, its best run in five years; the Hang Seng tech index snapped its longest weekly losing streak on record and rose 3.6%.

The Asian and Pacific economic data calendar on Monday will be dominated by a raft of purchasing managers index (PMI) reports, most notably for China, Japan, India and Australia, with Indonesian inflation thrown in for good measure.

Teed up for A Bullish Start to The Week_1

Asia's PMIs have been mixed. Manufacturing in India is growing at its fastest pace in two and a half years, South Korea's is in its longest spell of contractionary readings in 14 years.

Market sentiment in Asia on Monday could also get a lift from signs of a potential thaw in U.S.-Sino relations, as a senior U.S. State Department official arrived in Beijing on Sunday with meetings planned for the coming week.

On the other hand, oil prices could spike higher on the news that OPEC+ is looking to cut production to counter flagging prices and a looming supply glut.

Looking ahead, investors in Asia have plenty of economic events and monetary policy decisions to get their teeth into this week.

Inflation data from Indonesia, the Philippines, Thailand, Taiwan and China will be released, starting with Indonesia on Monday. Economists polled by Reuters expect annual CPI inflation eased in May to a one-year low of 4.22% from 4.33% in April.

Teed up for A Bullish Start to The Week_2

Revised Japanese GDP is out on Thursday, while the monthly 'data dump' from China this week includes consumer and producer price inflation, trade, FX reserves and total social financing (TSF), a broad measure of credit and liquidity in the economy.

These reports will give a clearer picture on how the world's second largest economy is emerging from its pandemic lockdown. So far, it has massively undershot expectations, which is why Chinese assets have been under so much pressure.

On Tuesday, the Reserve Bank of Australia is expected to keep its cash rate on hold at 3.85%, and on Thursday the Reserve Bank of India is also expected to keep its repo rate unchanged at 6.50%, according to Reuters polls.

Here are three key developments that could provide more direction to markets on Monday:

- PMIs from China, Japan, India, Australia

- Indonesia CPI inflation (May)

- Singapore retails sales (April)

Source: Yahoo

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Traders' Opinions

In a significant development for India's burgeoning electric vehicle (EV) industry, Tata Group, one of the country's largest conglomerates, has announced plans to construct a state-of-the-art giga-factory in Sanand, Gujarat, dedicated to the production of lithium-ion cells. This landmark agreement, backed by an estimated initial investment of approximately 130 billion rupees ($1.6 billion), is poised to reshape the nation's EV landscape and reinforce India's commitment to building a robust electric vehicle supply chain.

The strategic decision made by Tata Group reflects a deep understanding of the growing demand for EVs in India, along with the need for a localized battery manufacturing ecosystem. The new facility, with an initial manufacturing capacity of 20 Gigawatt hours (GWh), will play a pivotal role in fulfilling India's ambition to establish a self-reliant EV industry.

By investing in this giga-factory, Tata Group aims to leverage the rapid growth potential of the Indian EV market and position itself as a frontrunner in the domestic battery manufacturing sector. This move aligns with the company's broader sustainability objectives and its commitment to reducing carbon emissions.

The plant's location in Sanand, Gujarat, was strategically chosen due to its favorable business environment, proximity to key markets, and strong support from the local government. This collaborative effort between Tata Group and the Gujarat government highlights the commitment of both parties to foster industrial development and promote clean energy solutions in the region.

The giga-factory's first phase will provide an initial manufacturing capacity of 20 GWh, a substantial boost to India's domestic battery production capabilities. Notably, plans for the future include the possibility of doubling the plant's capacity through a second phase of expansion. This forward-thinking approach demonstrates Tata Group's long-term commitment to meeting the evolving demands of the EV industry and contributing to India's green energy revolution.

The establishment of this advanced battery manufacturing facility will not only bolster the domestic supply chain but also create significant employment opportunities. It is anticipated that the project will generate a substantial number of direct and indirect jobs, further driving economic growth in the region and supporting India's overall development objectives.

The Tata Group's foray into EV battery production represents a transformative milestone for the Indian automotive industry. By localizing the manufacturing of lithium-ion cells, India can significantly reduce its dependence on imports and establish a robust ecosystem for electric vehicle production. This development is expected to catalyze further investment in the sector and encourage the growth of ancillary industries, including EV component manufacturing and research and development.

With Tata Group's commitment to innovation, sustainability, and technological advancements, their ambitious investment in the giga-factory marks a pivotal moment in India's journey towards a cleaner and greener transportation future. The project aligns with the government's ambitious vision for electric mobility, contributing to a more sustainable and eco-friendly transportation landscape for the nation.

Overall, Tata Group's $1.6 billion investment in the giga-factory signifies a significant stride towards India's ambition of becoming a global leader in the electric vehicle sector. The project holds the potential to revolutionize the country's EV industry, foster economic growth, and contribute to a greener and more sustainable future for India.

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Damon

Economic

The economic airplane hasn't reached the runway yet and has hit some more heavy turbulence in 2023 - but investors suspect a relatively gentle touchdown may be back on the cards.

It's not even midyear yet, but the full gamut of scenarios has been juggled in just five months.

World markets have swung from "hard landing" fears of late 2022 to the "soft landing" hopes of the new year and then even unnerving thoughts of "no landing" at all - just before the banking stress hit of March forced them to return to square one.

But as half-year investment outlooks hit inboxes and go on roadshows - and another crosswind from a risky U.S. debt ceiling crunch dissipates - hopes of walking away without serious damage from this hair-raising post-pandemic trip have re-emerged.

"The economy is more resilient than the market realizes," BlackRock's Chief Executive Larry Fink said on Wednesday, adding more interest rates rises will be necessary but that he saw no "evidence that we're going to have a hard landing."

Of course, there's no rulebook on these potential "landings".

A "soft landing" typically relates to the ability of the Federal Reserve and other central banks to get inflation back close to 2% targets without crashing the economy into a deep contraction with surging unemployment via extreme rate rises.

That's a narrow airstrip - subject to all kinds of definitional argument. Does a mild technical recession of two quarters of falling national output equate to a crash if "full employment" assumptions of jobless rates below 5% prevail?

On that looser take, the Fed has indeed managed to pull off the trick in nearly half the slowdowns of the past 60 years.

Judged by the remarkable strength of the jobs market this time around, even as inflation slows and the historically brutal Fed hiking campaign nears an end, it's not hard to see why hopes are rekindled. The ebbing of regional U.S. bank worries helps.

It also depends on whose perspective you take. A gentle bump on the tarmac for most households may not feel that "soft" for investors - who have arguably already suffered a hard landing in one of the worst annual recoils in both stocks and bonds on record last year.

And of course, pernicious risks remain - from rancorous geopolitics, energy volatility, the lagged effect of credit tightening on real estate and the sizeable attraction of staying in cash with rates of 4%-5%. Hopes of Economic 'Soft Landing' Re-Emerge After Stormy Descent_1

Hopes of Economic 'Soft Landing' Re-Emerge After Stormy Descent_1

'Nothing easy'

But many asset managers argue risks always abound and the central case is what matters most from here - with peak interest rates, persistent corporate earnings growth, tech sector excitement around artificial intelligence and some attractive valuations around the world.

"The core scenario is actually relatively constructive," said Willem Sels, chief investment officer at HSBC Global Private Banking, pointing out that diversified portfolios have already regained more than half their 2022 fall.

"So while many investors are sitting on cash, we don't," said Sels, advising clients consider blue chip dividend stocks, bonds, volatility strategies and hedge funds.

Although narrowly led by tech, the S&P500 is up almost 10% so far in 2023 - with the Nasdaq 100 up more than 30% and the AI-fueled FANG+TM group of 10 leading digital, chip and tech megacaps up a whopping 65%. The wider MSCI all-country stock index is up 8%.

Relieved the debt ceiling saga is near over, Wall Street's "fear index" - the VIX gauge of Wall St equity volatility - on Thursday approached its lowest close since 2021.

Even the broadest indices of U.S. and global government and corporate bonds are up nearly 2% in the year to date despite the persistent inflation, interest rate and political angst.

Few asset managers seem bullish per se. Even if U.S. recession is averted this year, the combined effect of monetary tightening and ongoing liquidity withdrawal in both the United States and Europe - alongside more restrictive fiscal policies - continues to make many investment houses fret.

"Nothing easy or pleasant is usually associated with episodes of liquidity withdrawal as intense as the one that the global economy is now experiencing," State Street Global Advisors' chief economist Simona Mocuta told clients.

But while this keeps the global growth fragile through the end of this year and 2024, and should keep investment strategies cautious too, State Street reckons a deepening and broadening of disinflation is the one "silver lining" in the outlook.

"Reaching 2% - or close enough that the difference will not matter - in 2024 is not such an impossible hurdle as the general opinion seems to imply," Mocuta said. "Not in a world where price competition likely re-emerges as backlogs shrink, demand slows and base effects work in one's favor."

If correct - and not all agree - the prospect of a sustained return to 2% inflation targets would surely turn off the seatbelt sign. Hopes of Economic 'Soft Landing' Re-Emerge After Stormy Descent_3

Hopes of Economic 'Soft Landing' Re-Emerge After Stormy Descent_3

Source: U.S. News

To stay updated on all economic events of today, please check out our Economic calendar

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Justin

Central Bank

Economic

Commodity

Will the RBA deliver another surprise hike?

The Reserve Bank of Australia caught markets off guard when it hiked rates last month and there’s a risk that policymakers could again lift borrowing costs higher by 25 basis points when they hold their June meeting on Tuesday.

However, the economic data has been somewhat mixed lately so the RBA might decide to pause again to get a better picture of what is happening in the economy. The jobless rate edged up slightly in April and the flash PMIs pointed to a modest softening in economic activity in May. However, monthly inflation readings for April were hotter-than-expected.

First quarter GDP growth figures are due on Wednesday but might come too late for the RBA to fully factor the data into its decision. Also out on Wednesday is the AIG manufacturing index.

Week Ahead – RBA and BoC to Hold Rates But Might be Tempted to Hike, OPEC+ Meets_1

Another consideration for policymakers is the faltering recovery in China. The slowing demand for industrial metals and other resources from the world’s largest consumer of such commodities is bad news for Australian exporters whose number one market is China.

Hence, the RBA has more incentive to skip a hike, while maintaining a tightening bias and investors appear to be converging with this view as they’ve currently assigned around 55% probability of no change in June but a 25-bps hike is fully priced in for August.

Week Ahead – RBA and BoC to Hold Rates But Might be Tempted to Hike, OPEC+ Meets_2

The Australian dollar has tumbled to more than six-month lows versus its US counterpart but could receive support from a hawkish RBA. Aussie traders will also be keeping an eye on some Chinese indicators coming up next week.

The trade balance will be important on Wednesday to see how exports and imports fared in May, and on Friday, the latest consumer and producer price indices will provide fresh clues on the strength of domestic demand.

BoC may not be done with rate hikes

The Bank of Canada has been on pause since March but like the RBA, a rate hike is back on the table. The Canadian economy enjoyed a strong rebound in GDP growth in the first quarter, expanding by 0.8% q/q. The labour market is heating up again, while headline inflation unexpectedly accelerated in April.

However, underlying measures of inflation continued to decline and this may convince enough policymakers to stay on pause for another meeting in case the increase in headline CPI was a blip.

Markets are expecting the BoC to remain on hold at least until September before resuming its tightening cycle. But should policymakers display a strong inclination to hike soon, this would likely increase the focus on Friday’s employment report for May.

Week Ahead – RBA and BoC to Hold Rates But Might be Tempted to Hike, OPEC+ Meets_3

Another strong set of jobs numbers could bring rate hike bets forward, boosting the Canadian dollar.

OPEC+ has a tough balance to strike

The oil-sensitive loonie will also be watching developments with OPEC+. The oil cartel will gather on Sunday to decide whether to follow up April’s surprise cut with a further reduction in output quotas. Russia has signalled it does not favour more cuts but the de-facto leader of the pact, Saudi Arabia, is more mindful about the lacklustre performance of oil prices over the last couple of months.

Indeed, Saudi Arabia is in a difficult position. By slashing production yet again it could end up conceding more market share to Russia, who is selling oil on the cheap to Asian countries that are able to evade Western sanctions slapped on Moscow over the war in Ukraine.

The other problem for the Saudis is that another output cut might send the message that oil producers are becoming more worried about the weakening outlook for oil prices and this could trigger the opposite reaction in oil futures, unless they decide on a very large reduction.

Week Ahead – RBA and BoC to Hold Rates But Might be Tempted to Hike, OPEC+ Meets_4

Quieter week looms for the dollar

In the United States, the main highlight is the ISM non-manufacturing PMI on Monday, and April factory orders due the same day might attract some interest too.

Although the American economy has lost some steam lately, it is far from being out of momentum and the ISM survey should offer a glance as to how things stood in May in the services sector.

Week Ahead – RBA and BoC to Hold Rates But Might be Tempted to Hike, OPEC+ Meets_5

Communication from the Fed has been rather conflicting heading into the June 14 FOMC decision, but more recently, it appears that the doves, likely led by Chair Powell himself, are building a case to sit out the next meeting.

There is still one more CPI report on the way before then, but the ISM PMI will have some significance given the growing divisions within the Fed.

If the odds start to shift again in favour of a June hike, the US dollar could find itself back on the front foot.

Can the yen extend its rebound?

One of the beneficiaries of the dollar’s recent setback has been the Japanese yen, which is recovering from six-month lows. Next week’s data out of Japan are unlikely to have too much of an impact but they could nevertheless aid the recovery if they are broadly positive.

Kicking things off on Tuesday are household spending stats for April, along with cash earnings for the same period. A pick up in wage growth might add to bets that the Bank of Japan will abandon its yield curve control policy sooner rather than later. On Thursday, the Q1 GDP estimate is likely to get revised up following the positive revision to capital expenditure.

Finally, in the euro area, German industrial orders and output numbers for April (Tuesday and Wednesday, respectively) will probably grab the most attention amid a manufacturing-led technical recession in Europe’s largest economy.