Faceoff over crude

Faceoff over crude

OPEC’s meeting had some unexpected commentary; the Fed heard tales of good times; Bank of England surprised its markets.

"The first shots in a potential trade war have now been fired"
IMF Chief Economist Maurice Obstfeld, in the most recent Global Economic Outlook

Oil: Crude faceoff:  OPEC’s April 20th  meeting took place in the context of renewed discipline over production, as well as continuing strength in demand – which have brought crude oil prices to levels not seen since late 2014, when crude was ending its slide from $115 to $47 in the face of supply from U.S. shale oil fields. As of early afternoon April 20, Brent was at $73.66 per barrel (bbl); West Texas Intermediate (WTI) was at $68.13 – the $5.53 differential being the result, among other factors, of the plentiful supply of shale oil in the U.S.

The 10.2% (Brent) and 12.8% (WTI) price appreciation since the end of 2017 has generated the usual debate over whether stocks in oil-related industries are overvalued or about to rise dramatically. Among the beneficiaries of higher prices are companies owning reserves in the ground, as well as heavily-leveraged exploration and production (E&P) companies whose debt payments and production costs are relatively inflexible, but whose revenue streams are geared to the prices they can get for what they find, pump and ship.

Energy consumers such as power generators, aluminum and steel producers, transportation companies, commuters and vacationers may be less fortunate. The unanticipated tweet on crude-oil prices from the White House, that oil prices “will not be accepted,” while generating additional attention, have had little impact on industry fundamentals so far.

U.S. growth: The Fed’s anecdata
shows… The Federal Reserve publishes its anecdotal survey of its 12 regional districts several times a year. The most recent “beige book” is based on information collected through April 9, and found all districts reporting an expanding economic output and positive economic outlook.

It’s noteworthy that the impact of newly-raised tariffs on steel and aluminum were clearly visible. Businesses in much of the U.S. reported significant price increases for products made from those two inputs, a few in the “double-digit” range. Companies using them to produce their own outputs were clearly feeling the pinch.  But the report contained relatively little information so far about rising profits among the U.S.-based producers of steel and aluminum. The earnings of the publicly-traded producers will no doubt be scrutinized for any such signs.

UK: When Carney talks
During a BBC interview, Bank of England (BoE) governor Mark Carney left listeners and currency traders with the distinct impression that a widely-expected rate hike at the Monetary Policy Committee (MPC) meeting on May 10. might not take place. Carney stressed the importance of “keep[ing] the economy on a stable path” both before and after Brexit, stating that the MPC would be “conscious that there are other meetings” at which hikes could be made in 2018.

The British pound traded down -1.6% to a low of $1.4007 by mid-morning Friday as anticipated profits from trading the two currencies fell. Against the euro, the pound fell about 1.1% over the same interval, but that was after a 1.15% fall to €1,1 466 on the 18th. UK money markets marked down the implied probability of a May 10 hike from 82% on the 19th to about 56%.



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