OPEC: Production caps, the hard way

OPEC: Production caps, the hard way

Some Opec and other producers can't fill even minimum production quotas; Italy's latest proposed coalition spooked markets; U.S. retail sales were good, but not great; German companies' order backlog sent mixed messages.

“Any renegotiated NAFTA that implies losses of existing Mexican jobs is unacceptable."
Ildefonso Guajardo, Mexico’s Economy Minister

Crude oil: Production caps, the hard way The benefits accruing to the prices of Brent and WTI crude oil are coming from two main sources: within Opec, it’s the inability of Venezuela and Angola to produce the volume of crude oil their quotas allow; outside Opec, it’s Russia’s crumbling oil infrastructure and sanctions, as well as the difficulty of getting U.S. Permian Basin crude oil to its customers.

Brent crude briefly touched $80 per barrel (bbl) on May 17, a price not seen since October 2014, as crude was falling from $115 to $47 – and eventually to $27.88 on January 20, 2016. It’s unclear what, if any, effect the chaos around the multiparty Iran nuclear deal will have on that country’s ability to sell on the open market.

With global growth in solidly positive territory, the demand side of the equation is unlikely to offer any relief.  Neither is the U.S. consumer’s preference for larger vehicles, combined with the higher profitability of said vehicles to their manufacturers.

Politics in Italy: Careful what you wish for The newly-formed populist coalition, which includes the League and the Five Star Movement, revealed its difficult-to-negotiate “government contract”, which leaves some key items unspecified – like the name of the new Prime Minister. More important for financial markets: the creation of a “public investment bank”, supporting airline Alitalia despite its troubles, and introducing such “budget-busters” as a “universal citizens’ income” and a rollback of the rise in the minimum retirement age.

Financial markets voted with their feet, sending the FTSE MIB index down about 1.5% at the close, and putting the yield spread between Italy’s and Germany’s sovereign bonds at an uncomfortable 165 and 68 basis points for the 10- and 2-year. But the members of the respective parties have yet to vote on their joint program, so the worry created by the as-yet-incomplete details of the program might be premature.

U.S. consumption: Paying retail After the upward revision for March, April’s retail sales figures were on trend but no better, at 3% for the headline figure as well as the more precise control-group number, which excludes vehicle dealers, service stations and building material stores. Though not disappointing, the figures suggest that consumers are not driving, or even leading, the economy toward faster growth.

German factory backlog: Mixed messages Germany’s Federal Statistics Office reported the economy-wide factory order backlog was large enough to keep factories busy for over five months without additional orders. The figures are even larger for producers of investment goods, referring to items used in the manufacture of other goods. All this led Germany’s central bank to start its report for April as follows: “The German economy continues to boom…”

But another way to look at the backlogs is as a representation of production bottlenecks, If those bottlenecks are created by parts shortages from elsewhere, these figures send an entirely different message.


All data Source: Bloomberg

The North American Free Trade Agreement (NAFTA) is an agreement among the United States, Canada and Mexico designed to remove tariff barriers between the three countries.

West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content. It is the underlying commodity of Chicago Mercantile Exchange's oil futures contracts.

Brent Crude Oil is a major trading classification of sweet light crude oil that serves as a major benchmark price for purchases of oil worldwide. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content. Brent Crude is extracted from the North Sea and comprises Brent Blend, Forties Blend, Oseberg and Ekofisk crudes.

The FTSE-MIB Index consists of the 40 most liquid and capitalized stocks listed on the Borsa Italiana. Foreign shares are eligible for inclusion.



IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.