The unexpected move by Saudi Arabia and other members will lead to a decline in output of almost -1.2 million barrels of crude per day starting next month, rising to an estimated -1.6 barrels per day reduction by July after Russia implements a planned cut of -500,000 million barrels per day.
Energy experts are divided over the potential impact of the cuts. Some expect oil could rise as much as +$10 per barrel or more and push gasoline prices back toward the $4.00 level. Gasoline prices at this time last year were hovering around $4.20 per gallon compared to the $3.50 per gallon reported by AAA as of Sunday.
Some experts question whether the new cuts will have a significant impact, however, pointing to the fact that OPEC+ members have been running short of production targets by about -2 million barrels per day. Meaning the production cuts are not as deep as the actual production shortfalls. Some expect those shortfalls could grow, too, as Russia struggles to service its oil infrastructure and various issues in other OPEC countries that have slowed output.
OPEC's lower output may also be offset by production increases in non-OPEC countries, including the US, Brazil, Canada, and Norway. For investors, the threat of higher oil and gasoline prices means that inflation may stay elevated for longer, in turn forcing the US Federal Reserve and other global central banks to hike rates higher and hold them there longer than anticipated.
At the same time, investors are heavily debating the possibility that the US might slip into recession later this year as the combination of high inflation and rising interest rates strangles growth.
When we ended last week, the trade was thinking it was basically a coin-toss if the Fed would hike rates by another 25-basis points at it's next FOMC meeting in May, after which the Fed would pause and then start cutting rates into year end. With the latest move by OPEC and Russia to further tighten oil supply, it will be interesting to see if the trade still believes rates will be lower at the end of this year than they are right now, especially if inflation reignites from crude oil pushing higher.
Let's also keep in mind, the move by Saudi Arabia is somewhat a slap in the face to US leaders who have been urging OPEC to help fight inflation and to keep its spigots fully open.
A couple of other events this week have the potential to reignite Wall Street's "risk-off" mentality.
Here at home, former President Donald Trump is expected to be arrested in New York which some fear could create even greater political divide in Washington just as lawmakers are wrangling over raising the debt ceiling. Failure to do so could result in a debt default later this summer. Internationally, House Speaker Kevin McCarthy will meet with Taiwan’s president, Tsai Ing-wen, in California on Wednesday. This risks further raising tensions between the US and China at a time when most experts say they are already historically high.
China claims self-governed Taiwan is part of its territory and considers recognition of the island as an independent nation a "red line." The US and China are already battling it out over technology access and alleged spying, while also being deeply divided over Russia.
Today, investors will be digesting the ISM Manufacturing Index which since December has been below 50, the threshold separating expansion from contraction.
More importantly, investors are anxious to see the "prices" component after the gauge made a big jump in February to 51.3 from 44.5 previously, the first increase in four months. The ISM Services Index is out on Wednesday with investors equally anxious to see how prices are trending amid ballooning wage growth in the sector.
The top highlight this week will be the March Employment Report on Friday.
Will Commercial Real Estate Fallout Cause more Banking Worries? Data floating around inside the trade estimates that $270 billion in commercial real estate loans are up for renewal this year, of which about 70% of that debt is held by small regional banks.
Retail and Professional Investors Slow Stock Purchases: Individuals’ stock purchases have slowed sharply in recent weeks, falling to levels not seen since November 2020, Vanda data show. Individuals bought about $8.9 billion of U.S. equities on a net basis in the 10 trading sessions ended Thursday, down from a peak of $17 billion in the comparable period ended Feb. 16. As individual investors’ enthusiasm for stocks wanes, professional money managers are also keeping U.S. equities at bay. Fund managers’ U.S. equity allocation has fallen to an 18-year low, according to Bank of America Corp.’s March global fund manager survey, with a net 44% of investors underweight U.S. equities. institutional clients at Bank of America have pulled a net $6.8 billion out of U.S. equities this year, according to the lender’s equity-flows data released March 7. Total assets in U.S. retail money-market funds reached a record last week, according to the Investment Company Institute. Retail money-market funds as of Wednesday have added about $196 billion in assets since the start of 2023—the greatest first-quarter inflow in ICI history, going back to at least 2007.Source WSJ
Ford Plans to Send Drones to the Rescue for Dead Batteries: Dead battery? Ford Motor has a unique solution to that problem and one that illustrates how car companies are adapting and improving technology to improve drivers’ lives. Ford was issued a patent earlier this week for a “system including a computer programmed to actuate a plurality of drones to first establish one or more electrical connections there between and then to provide a jump start to a vehicle.” Investors will have todecide if the drone patent matters or if it’s more useful, or cooler, than the Tesla patent for “pulsed laser cleaning of debris accumulated on glass articles in vehicles and photovoltaic assemblies.” It’s part of the companies’ R&D efforts. GM and Ford reported $9.8 billion and $7.8 billion in engineering, design, research and development spending in 2022, respectively. Tesla reports an R&D number; it spent $3.1 billion in 2022. Source Barrons
AI Could be both Good and Bad for Economy: If generative AI lives up to its hype, the workforce in the United States and Europe will be upended, Goldman Sachs reported this week in a sobering and alarming report about AI's ascendance. The investment bank estimates 300 million jobs could be lost or diminished by this fast-growing technology. Goldman says that for companies, there will be cost savings thanks to AI as they will be able to deploy their resources toward building and growing businesses, ultimately increasing annual global GDP by +7%. In recent months, the world has witnessed the ascendency of OpenAI software ChatGPT and DALL-E. ChatGPT surpassed one million users in its first five days of launching, the fastest that any company has ever reached this benchmark. While the startup ecosystem has stalled due to adverse economic changes, investments in global AI projects have boomed. From 2021 to now, investments in AI totaled nearly $94 billion, according to Stanford’s AI Index Report. If AI continues this growth trajectory, it could add +1% to the U.S. GDP by 2030. Source Forbes
Justice Department sues Norfolk Southern Over Derailment: The federal government filed a lawsuit against railroad Norfolk Southern over environmental damage caused by a train derailment on the Ohio-Pennsylvania border that spilled hazardous chemicals into nearby creeks and rivers. The U.S. Department of Justice said it’s seeking to hold the company accountable for “unlawfully polluting the nation’s waterways and to ensure it pays the full cost of the environmental cleanup,” in the lawsuit filed Thursday. It’s asking for fines under the Clean Water Act and for a judgment to hold the railroad accountable for past and future costs. Chemicals from the derailed cars and firefighting foam seeped into creeks and rivers near East Palestine, with some eventually ending up in the Ohio River. So far, more than 9 million gallons (34 million liters) of wastewater have been removed from the site and hauled to hazardous waste storage sites in Ohio and other states, according to the state officials. Ohio filed a lawsuit against Norfolk Southern just over two weeks ago to make sure it pays for the cleanup and environmental damage, and pays for groundwater and soil monitoring in the years ahead. Source AP News
Tesla Delivers Record Number of Cars: Tesla delivered 422,875 vehicles, a record high for the automaker but smaller than analyst expectations for 430,008 vehicles, according to Refinitiv data. Investors have been watching Chief Executive Elon Musk's gamble that cutting prices would stimulate sales, making up for the profit hit from eroding margins. Tesla deliveries grew 4% from the previous quarter and were 36% higher than a year ago. The carmaker produced more cars than it delivered, manufacturing 440,808 vehicles for the first three months of this year. Tesla delivered +6% more of its mainstay Model 3/Model Y vehicles than the previous quarter. But the number of deliveries for its higher-priced Model X/Model S vehicles slumped by -38%. Source Reuters
Japan Buys Russian Oil at Prices Above Cap: The U.S. has rallied its European allies behind a $60-a-barrel cap on purchases of Russian crude oil, but one of Washington’s closest allies in Asia is now buying oil at prices above the cap. Japan got the U.S. to agree to the exception, saying it needed it to ensure access to Russian energy. The concession shows Japan’s reliance on Russia for fossil fuels, which analysts said contributed to a hesitancy in Tokyo to back Ukraine more fully in its war with Russia.The oil purchases, while tiny and authorized by the U.S., represent a break in the unity of U.S.-led efforts to impose a global $60-a-barrel cap on purchases of Russian crude oil. The cap works because oil-buying nations, even if they aren’t aligned with the U.S., generally need to use insurance and other services from companies based in the U.S. or one of its allies. The G-7, the European Union and Australia have agreed to rules forbidding those companies from furnishing services if a buyer of Russian oil is paying more than $60 a barrel. Source WSJ
The TikTok Ban is Causing a Generational Divide: Congressional hearings aren’t a typical must-watch for members of Gen Z, but the March 23 grilling of TikTok CEO Shou Zi Chew appears to have been an exception. On the same day that Congress marched through its five hours of questioning, TikTok began flooding with videos skewering lawmakers’ queries as clueless about the app, and technology in general. As the U.S. wrestles with how to address national-security concerns around TikTok and its Chinese parent company ByteDance—including potential Chinese surveillance of U.S. data and the spread of Chinese Communist Party propaganda—a portion of the app’s roughly 150 million U.S. users are up in arms over the possibility of a ban. According to 2023 data from Insider Intelligence, 46% of TikTok users are in Gen Z, which the researchers define as people born from 1997 to 2012. They’re trailed by millennials, who make up 34% of users, Gen X (12%), and baby boomers (7%). Ironically, one of the things that Gen Z TikTokers say Congress seems to misunderstand is the political implications of banning the app. While the youngest members of Gen Z aren’t yet eligible to vote, the cohort is growing into an important force in American politics. Gen Z is the third-largest generation in the U.S., constituting about 20% of the country’s population, slightly trailing millennials and boomers. Source Barrons
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