Conflicting objectives – market share vs. price stability – keep the pressure on crude oil prices; confidence in U.S. growth is the main issue; European growth increases
“It’s unbelievable that this is happening in an oil producing country”
OPEC: Oil pressure The December agreement to lower crude-oil production seemed to hold in January and February of this year, with the price of the near Brent future averaging about $55 per barrel (bbl) and WTI trading at about $53/bbl. But it's been a different story so far in March; Brent is now trading just above the psychologically-important $50 level, last seen before the December agreement came into force, WTI is now trading in the $47-$48 range.
The price pressure appears to stem from two sources: First, the lack of success of Saudi Arabia's campaign to drive U.S. shale producers out of the global market – witness the resurgence of the price spread between Brent and WTI, peaking at $3.74 on March 21 before pulling back to $2.86. Second is the continued interest of Gulf producers in maintaining market share with their Asian consumers.
A painful side-effect of the pressure can be seen in Venezuela. The country's main source of foreign exchange comes from the sale of crude oil – much of which is sold to China under a long-standing trade agreement – which underpins the value of large part of the country's bonds. But due to the collapse of the country's own refining capacity due to underinvestment, the country has been forced to import refined products, including gasoline – which it sells at pennies to the dollar as part of the government's aggressive price subsidy program. Since the government can't afford to import sufficient gasoline and diesel to satisfy demand while paying off its bonds, fuel shortages are common. And the weakness of global crude oil prices puts additional pressure on the government's finances.
U.S. growth: Confidence abounds Several measures of the economy's strength are on the upswing, including sales of new homes (reaching a seven-month high in February, despite rising mortgage rates), durable goods orders and shipments (both better than expected, and revised upward for January), and consumer sentiment, as measured by the well-regarded University of Michigan survey. This last measure showed that sentiment about "current conditions" came in at the highest reading since November 2000. At the same time, one indication of inflation expectations five years from now, the "5-year forward breakeven rate", is moderating, moving downward toward 2.08% despite the Fed's recent rate hike.
One important observation: the majority of these measures are affected as much by beliefs about a better future as they are by hard-dollar economic results. Should those hard-dollar economic results disappoint, those sentiment-driven measures could just as easily reverse.
European Union: Green shoots Preliminary measures of overall growth for the EU surprised on the upside for March, with PMIs for manufacturing and services at 56.2 and 56.5 respectively, strongly signaling expansion and both notably higher than expectations. Not a complete surprise, figures for Germany were even better, at 58.3 and 55.6. Perhaps most notably, France's PMIs also surprised on the upside at 53.4 and 58.5. These strong figures, along with France's GDP growth for Q4 coming in at a solid 1.1% year-on-year rate, could presage a victory for more mainstream candidates at the expense of the political fringe – including the National Front's Marine Le Pen.