☀️☕️ Saudis push up Oil Price with a "Lollipop"

📊 Also: Joe's signature, Good is Good (for now); Hong Kong Squeezy 🎓️ OPEC and OPEC+

Happy Monday!

🪷 And for anyone still keen to learn about Vesak Day (stretching from April 8th in Japan to June 4th in Indonesia,) read our blog to see what it’s all about.

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📝 Focus

• Saudis push up Oil Price with a "Lollipop"

📊 In the Markets

• Joe's signature, Good is Good (for now)

• Hong Kong Squeezy

📖 MoneyFitt Explains

🎓️ OPEC - The Organization of Petroleum Exporting Countries (and OPEC+)

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📝 Focus

Saudis push up Oil Price with a "Lollipop"

Facing a 38% slide in the oil price since the recent peak almost exactly a year ago and fearing that a global recession would continue that slide, OPEC+🎓 on Sunday announced that the oil output quota cut announced last April would be extended to the end of 2024, AND increased by another 1.4mn barrels per day (bpd). Saudi Arabia also surprised watchers by cutting an ADDITIONAL 1mn bpd for July that was "extendable." OPEC+, which produces 60% of the world's oil, cut output by 2mn bpd last October and in April (see MFM), agreed to cut another 1.6mn bpd for the rest of 2023, surprising experts (again). In total, that came to 3.7mn bpd or 3.6% of global demand. The April announcement briefly sent oil prices higher before the slump resumed, and at close to $70/bbl ("bbl" = barrel of oil) in end-May, it was well below the level seen before that surprise cut.

“This is a Saudi lollipop... We wanted to ice the cake... This market needs stabilisation”

  Saudi Energy Minister Prince Abdulaziz bin Salman, describing the sweetener to its fellow cartel members from his country's production cut to 9mn bpd from 10.5mn pre-April.

- Image credit: TradingView

..... ▷ Expert oil-watchers had mostly expected OPEC+ producers to maintain their current levels, but negotiations were always expected to be tough, with the push-me-pull-you effect on countries' oil earnings of producing less at a higher price vs producing more at a lower price. Saudi Arabia, the largest producer, wants higher prices, while Russia, the world’s second-largest oil exporter, is keen to maintain production, and the UAE (#4) wants to raise its output. Back in March 2020, oil prices collapsed during the Covid pandemic, yet Russia refused to cut production, and OPEC+ nearly collapsed. Saudi responded by flooding the market with record exports before they came to an agreement. (The next meeting is scheduled for November.)

..... ▷ Oil prices can be a useful but imperfect indicator of the health of the global economy: High prices can be a sign that economic growth is strong and that demand for oil is high, but can also be for other reasons, such as political instability in oil-producing countries or supply disruptions. When low, it can be a sign of soft economic growth or because of an increase in supply. But oil is so important that the price can trigger events as well: high prices lead to slowdowns from higher inflation (the oil shocks of the 1970s led to a global recession) and vice versa (the oil price collapse in the 1980s from the peak of $39/bbl to under $10/bbl helped fuel growth in the United States.)

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📊 In the Markets

Joe's signature: After the Republican-controlled House voted 314 to 117 to approve the bipartisan/compromise bill suspending the US government's $31.4tn debt ceiling and the Democrat-controlled Senate voted 63 to 36 the same way, US President Joe Biden signed it at the eleventh (and a bit) hour, averting a potential global catastrophe and ending what would anywhere else be an embarrassing display of partisan politicking.

..... ▷ Just like on Thursday after the House passed the bill, markets rose, and just like that day the main focus was actually more on avoiding a recession with strong labour market data that would have sent markets crashing just 4 months ago (see MFM from February when it did just that.)

Red-Hot US Labour market: The biggest driving factor for the US market rally was May's blistering jobs report showing a seasonally adjusted 339,000 jobs created, absolutely miles above the average of 190,000 that experts were expecting in a Reuters survey. So Wall Street thinks good news for normal people is good news for them too, with the resilient job market implying that the threat of recession is lower?

..... ▷ Perhaps. Stock markets were also excited by a bump UP in the unemployment rate to 3.7% from the 50+ year low rate of 3.4%, which encouraged traders who were more worried about another interest rate hike in June. (The assumption is that rising unemployment means the Fed is less likely to raise interest rates, and higher interest rates are usually negative for share prices.) Wage growth also slowed down a bit to 4.3%, meaning that with inflation still above 6%, workers are still seeing their buying power eroded. Bond market traders were not so bullish, with bond prices falling and yields on US Treasury bonds surging. The more sensitive 2-year yield was up 0.18% to 4.51%, and the benchmark 10-year yield was up 0.08% to 3.69%.

Hong Kong Squeezy

Earlier on Friday, Asia-Pacific shares mostly rose on optimism regarding the debt ceiling bill's passing through the US Senate and the May jobs report (as above), led by Hong Kong’s benchmark Hang Seng Index, which shot up 4% for its best day since early March. China internet giants such as Baidu, JD.com, Tencent and Alibaba led the way, pushing the Hang Seng Tech index up 5.3%, echoing trading in their US-listed shares overnight (easily tracked through HXC, the Nasdaq Golden Dragons index, which had been up 4%.)

..... ▷ Much of the rebound buying was from "short covering" (see below) coming at the end of a week, in which the index briefly breached the technical "bear market" zone (a 20% drop from the recent high - see MFM.) Bearishness has been widespread as China's economic recovery after December's abrupt lifting of the zero-Covid policy stutters and faces further threats from a global slowdown (despite "surprisingly" high exports earlier in the year.)

..... ▷ But though market rallies led by aggressive short covering, can very often be "dead cat bounces" (a short-lived rally in the middle of a protracted downturn) sometimes they can mark the very bottom before a sustained recovery. Which is it this time?

- Image credit: Shenmue / Sega Dreamcast via Tenor

..... ▷ Short selling and Short covering - a mini-explainer

• If you believe that a stock will go down for whatever reason, you can sell the shares you have. But if you don't own any of its shares, you can still sell them by first borrowing shares for a fee from an existing shareholder via your broker and then selling them on the market.

• If you're right, then you can buy them back (known as covering your shorts) at a lower price and pocket the difference, less the fee you paid to borrow the shares. Easy!

• BUT if the shares start shooting up, you have to decide very quickly if you want to buy back the shares or watch your gains disappear, or even start to make a potentially very big loss.

📖 MoneyFitt Explains

🎓️ OPEC - The Organization of Petroleum Exporting Countries (and OPEC+)

• A cartel of large oil-producing countries led by Saudi Arabia, which coordinates (but can't dictate) output in order to influence oil prices.

• The 13 nation members produce 40% of the world's oil and own over 80% of proven reserves. They include Iran, Indonesia, Nigeria, and Venezuela but not other major oil producers like the USA, Russia, the UK, Malaysia or Norway. In 2016, OPEC+ was formed, a loose alliance with 10 other top oil-exporting countries (including Russia).

• OPEC's mandate is for fair returns for investors, steady income for suppliers, and efficient supply for consumers. Not all about higher and higher oil prices, though in the popular press, it may seem that way.

• The concept's simple: if the supply of almost anything (such as a raw material) is limited, then the price tends to go higher. But if supply is too little and the price is too high relative to its uses, then the world has a way of finding substitutes. (Also, selling very little at a high price preserves oil reserves but may make less money for producers right now than selling a lot at a lower price.

• When OPEC says it is looking at output cuts, commodity markets react quickly by raising prices, with oil company share prices following suit... even before any output changes happen.