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Here’s Why Oil Prices Should Go Higher




On February 11, I predicted that Coronavirus would crush oil prices. Prices collapsed on February 20. Today, prices have reversed and WTI price is $2.00 higher on expectations of an OPEC+ production cut and central bank stimulus. Rising and falling sentiment about Coronavirus will be the framework for the rest of 2020.

As of last Friday, WTI prices had fallen 27% and Brent had fallen 15% since late December. Prices increased on Monday, March 2 but the oil price is being devalued despite today’s gains. Most of this is because of lower demand expectations and disruption of supply chains from Coronavirus (Covid-19).

Hope versus reality will be the manic pattern for 2020. The optimistic rebound of price during the week ending February 14 was short-lived and turned to capitulation the following week. WTI price dropped $8.62 and Brent fell $7.98 (Figure 1).

Figure 1. Hope versus reality will be the manic pattern for 2020. Brent price rose +1.38 (+2.7%) on March 2 on expectation of OPEC+ cuts & bank stimulus but price fell -$8.79 (-15%) after February 20. Source: Quandl and Labyrinth Consulting Services, Inc.

On March 2, Brent price rose by $1.38 (2.7%) on expectation of OPEC+ production cuts and central bank stimulus plans but longer market players aren’t buying false hope. Brent 12-month spreads fell 94% deeper into contango (Figure 2).

Figure 2. Brent longer market players aren’t buying false hope of production cuts and bank stimulus. Price rose 2.7% on Monday, March 2 but 12-month spreads fell $0.18 (-94%) to -$0.37. Source: Quandl and Labyrinth Consulting Services, Inc.

Markets seem to be reflecting two contrasting themes . Collapsing prices are recovering based on hope but spreads are more faithfully reflecting market fundamentals namely, that demand destruction cannot be fixed with bandaids. The worst effects of the Coronavirus on oil markets persist although may not be quite as serious as originally thought in early February.

As consensus builds toward Coronavirus apocalypse, short-term oil traders can easily find counter-parties to take the other side of a bet that prices will probably improve over the term of a contract. This pushes prompt contract prices down. Meanwhile, longer-term players may be able to see their way clear to an upturn in prices later in 2020 or in 2021 but for now, they recognize that neither OPEC+ nor central bankers can make the economic effects of Coronavirus magically disappear.

While the news about Coronavirus and its effect on oil markets is bad, there are some hopeful elements that may explain how markets are reacting now. Figure 3 shows that the number of cases in China appears to be leveling off and that people who have recovered is increasing. The scale of the chart under-states the expansion of cases outside of China. Still, the data suggests that fears of an apocalyptic pandemic may be exaggerated.

Figure 3. COVID-19 cases and recoveries. Source: Johns Hopkins and Labyrinth Consulting Services, Inc.

At the same time, Chinese data is suspect and confirmed cases are rising quickly outside China. Some people are returning to work in China but baseball stadiums are empty in Japan and Italy is looking a lot like the China of two weeks ago with quarantines and growing concerns.

Negative world demand growth is likely for 2020 (Figure 4). This optimistically assumes that only demand from China is affected and that a decrease of 200 million barrels for the first quarter is followed by recovery in the rest of 2020.

Figure 4. Negative world liquids demand growth is possible in 2020 (-0.3 mmb/d): -2.2 mmb/d in the first quarter of 2020 and -0.3 in the second quarter followed by weak but positive demand growth in the second half of 2020.

Source: OPEC, EIA, Vitol and Labyrinth Consulting Services, Inc.

That would result in the first quarter of negative demand growth since the 2008 Financial Collapse and the first year of negative demand growth since 2009. The “knock-on” effects of broken supply chains and demand destruction outside of China would result in an even more pessimistic, if more probable, forecast. In either case, it is unlikely that oil prices will recover substantially from current levels in 2020 or that Coronavirus will become a distant memory.

The near term is anyone’s guess at the moment but it is probable that the panic will be worse than the pandemic. I can imagine a scenario in which prices continue to fall from current levels but start to stabilize.

Comparative inventory suggests than the current WTI front-month price of about $47 is under-valued by at least $8 per barrel. I don’t believe that sentiment alone is responsible for this. Markets are assuming a substantial inventory build once lower demand begins to affect shipments at least for U.S. stocks. The price is still under-valued because inventory build will probably be more gradual than price anticipates.

I can also imagine a scenario in which panic drags near-term prices into the $30 to $40 range. That would probably not be sustainable for very long.

Whatever the short term brings, WTI prices should stabilize in the low- to mid-$50 range sooner than later, and move slowly higher as the emerging effect of Coronavirus on oil markets and the economy becomes clearer. Once this happens, prices will rise and fall on daily news that is either more or less hopeful about the impact of Coronavirus on demand and supply chains. That period of flux may last for 18 months or longer.

By Art Berman Source link


US stocks rally as Fed minutes meet expectations – Al Jazeera English



Investors fear that overly aggressive interest rate hikes by the Fed could tip the economy into recession.

Wall Street closed higher Wednesday, boosted after minutes from the Federal Reserve’s latest monetary policy meeting showed policymakers unanimously felt the United States economy was very strong as they grappled with reining in inflation without triggering a recession.

The minutes from the Federal Open Market Committee’s May meeting, which culminated in a 50-basis-point rise in the Fed funds target rate – the biggest jump in 22 years – showed most of the committee’s members judged that further such rate hikes would “likely be appropriate” at its upcoming June and July meetings.

“The uniformity of opinion is a good thing,” said Ross Mayfield, investment strategy analyst at Baird in Louisville, Kentucky. “There’s a lack of uncertainty of what needs to be done in the near term.”

“By the time [the Fed] gets to September, they will have plenty of economic data to make their move from there, so they continue to maintain optionality,” Mayfield added.

All three major US stock indexes gyrated earlier in the day amid increasing jitters stemming from business and consumer surveys, economic data and corporate earnings reports suggesting a cooling American economy – even as the Fed prepares to toss a bucket of cold water on it to tackle decades-high inflation.

Fears that overly aggressive interest rate hikes by the Fed could tip the economy into recession despite evidence that inflation peaked in March has driven those concerns.

“There’s some credence to the idea that inflation is doing [the Fed’s] job for them,” Mayfield said. “There’s already a cooling occurring, and financial conditions have tightened over the last month because of dollar strength and equity market weakness.”

On Thursday, the Department of Commerce is due to release its second take on first-quarter GDP, which analysts are expected to show a slightly shallower contraction than the 1.4 percent quarterly annualised drop originally reported.

The Personal Consumption Expenditures report will follow on Friday, which will provide further clues regarding consumer spending and whether inflation peaked in March, as other indicators have suggested.

The Dow Jones Industrial Average rose 191.66 points, or 0.6 percent, to 32,120.28, the S&P 500 gained 37.25 points, or 0.95 percent, to 3,978.73 and the Nasdaq Composite added 170.29 points, or 1.51 percent, to 11,434.74.

Nine of the 11 major sectors in the S&P 500 rose, with consumer discretionary stocks leading the pack with a gain of 2.8 percent. Inc and Tesla Inc provided the strongest lift to the S&P 500 and the Nasdaq, rising 2.6 percent and 4.9 percent, respectively.

Department store operator Nordstrom Inc surged 14.0 percent on the heels of its upbeat annual profit and revenue forecasts.

Fast-food chain Wendy’s Co jumped 9.8 percent after a regulatory filing revealed that shareholder Nelson Peltz was considering a potential takeover bid for the company.

Shares of Nvidia Corp fell more than 8 percent in after-hours trading after the company’s second-quarter revenue forecast missed expectations.

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Gas Up Nearly 4 Cents; Price Freeze Lifts in Labrador – VOCM



Despite predictions to the contrary, the regulated price of gas is up in most parts of the province.

Gasoline is up by 3.9 cents a litre, except along the coast of Labrador. Diesel on the island is up by 1.3 cents while diesel in Labrador has dropped by 11.6 cents a litre. Furnace oil costs over a cent a litre more on the island while stove oil on the island up by the same amount. Stove oil in Labrador is down by 23.70 cents a litre.

Propane meanwhile is down by just under 2 cents.

The suspension of maximum price adjustments on the coast of Labrador lifts as of today as fuel deliveries resume for the season—that means significant increases, in some cases by about a dollar a litre, for some fuels.

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Cheese not on the table in Canada-U.K. trade talks as Britain seeks market access



OTTAWA — The British foreign secretary has often been mocked for her preoccupation with cheese. It started eight years ago when Liz Truss expressed outrage in a speech to her party’s annual conference.

“We import two thirds of our cheese,” she raged. “That is a disgrace.”

Now Truss is facing another battle over cheese, this time with Canada.

Britain wants greater access to Canadian markets for more than 700 varieties of cheese including Stilton, Cheshire, and Wensleydale, a crumbly variety originating from Yorkshire.

But Ottawa has made it clear it does not want to see more British cheddar, let alone artisan varieties such as stinking bishop, renegade monk and Hereford hop, on Canadian fridge shelves.

During the first round of negotiations of the U.K.-Canada trade deal, Canada told Britain that a larger quota for British cheese is not on the negotiating table.

When it was a European Union member, Britain was part of the Comprehensive Economic and Trade Agreement with Canada, giving it some access to Canada’s cheese market.

After the U.K. left the EU, a “continuity agreement” with Canada was swiftly put in place to maintain the CETA arrangement until a bilateral trade deal could be struck.

Ralph Goodale, Canada’s high commissioner to the U.K., said if Britain wants more access to Canadian markets for its cheese as part of a bilateral free-trade agreement, it will have to knock on Brussels’ door and get its part of the dairy quota back.

“The point is we have already provided that volume in the EU deal and the British left it there without taking it with them,” he said in an interview. “That’s an issue they need to resolve with the Europeans because the Europeans have their quota.”

Goodale said the U.K.’s request for extra access for British cheese — on top of the access given to the EU — is “what the Canadian negotiators consider to be pretty much a dead end.”

“You are talking about a double concession — one we have already made to the EU and the request is being made by the U.K. for yet another one on top of that,” he said.

The high commissioner said Canada values its trading relationship with the U.K., adding that he is confident that a mutually-beneficial trade deal will be reached.

But if Canada allows the British to export more of their cheese it would involve “a major commitment of compensation to dairy producers” in Canada to make up for lost incomes.

In 2018, after the United States-Mexico-Canada Agreement gave the U.S. fresh access to the Canadian dairy market, Prime Minister Justin Trudeau said he would compensate Canadian dairy farmers.

Canada’s dairy industry was worth over $7 billion in 2020, according to the Canadian Dairy Commission’s annual report.

There are over 10,000 dairy farms in Canada — most of them in Quebec and Ontario — with an average of 92 cows per farm, it said.

Until at least the end of next year, Britain will be able to keep exporting its cheese to Canada under the trade continuity agreement, the U.K.’s trade department said.

This allows U.K. cheese exporters to access the Canadian market tariff-free under the EU portion of Canada’s World Trade Organization cheese tariff rate quota.

As part of the 1995 WTO agreement on agriculture, Canada established tariff rate quotas for cheese and other dairy products. The quotas set out quantities of dairy that could enter Canada with little or no duty.

For Britain, a fully fledged free trade deal with Canada is crucial after Brexit left it looking for fresh tariff-free markets.

“We want to negotiate an ambitious and comprehensive new agreement with Canada that will strengthen our close and historic bilateral trade relationship,” said a U.K. government trade spokesman in a statement, adding the relationship was worth about $34.5 billion in 2021.

In March, U.K. Trade Secretary Anne-Marie Trevelyan flew to Canada to announce with Canada’s Trade Minister Mary Ng that bilateral negotiations had officially begun.

In a speech in the House of Lords in London earlier this month, Goodale reported on progress in the talks, saying that “both sides are optimistic that, as good as CETA and the continuity agreement were, we can do better still when Canada and the U.K. negotiate a deal face-to-face, directly with each other.”

Like Goodale, Ng said Canada is confident a free-trade deal with Britain will be reached, enhancing co-operation in a number of areas, including on renewables, sustainability and the digital economy.

“Canada values the relationship with the United Kingdom. They are … an important trading partner and a trade agreement with the U.K. will be very good for Canadian businesses,” she said in a phone interview from Thailand last weekend.

But she was also firm about the need to protect Canada’s dairy producers, and that means keeping more British cheese out.

“I have been very clear, our government has been very clear, that we will not provide access to our supply-managed sector,” she said. “We have been clear about that from the get-go.”

The Canadian dairy sector now produces 1,450 varieties of cheese, including ewe, goat and buffalo varieties, as well as the cheese curds used in the Québécois dish poutine.

At least half of Canada’s cheese is made in Quebec, which is home to a number of artisan varieties including bleu l’ermite, or blue hermit, and Oka, a popular semi-soft rind cheese.

Pierre Lampron, president of the Dairy Farmers of Canada, has made it clear he will fiercely protect Canadian cheese from British interlopers.

Lampron said he had “validated that the issue of access to the Canadian dairy market was not on the agenda of these trade talks.”

Canada’s protectionist stance toward its dairy industry may have pleased farmers. But it has caused some tension with close allies.

Earlier this month, New Zealand launched a formal trade dispute against Canada, accusing the federal government of breaking promises to give access for dairy imports under the Trans-Pacific Partnership agreement.

The Biden administration also recently said it was asking for a second dispute settlement panel under the U.S.-Mexico-Canada Agreement to review a trade dispute with Canada over dairy import quotas.

This report by The Canadian Press was first published May 26, 2022.


Marie Woolf, The Canadian Press

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