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OPEC+ Shock Revives Oil Bulls Even as Demand Warnings Flash

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(Bloomberg) — OPEC+’s surprise oil-production cut sent shock waves through financial markets and pushed crude prices up by the most in a year. Now that the dust has started to settle, one question looms large: Will that price rally stick, or fade away?

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Banks from Goldman Sachs Group Inc. to RBC Capital Markets LLC raised their oil-price forecasts immediately after the OPEC+ cut. Yet, many traders still believe a souring economic outlook will block the group’s actions from pushing prices higher. Demand indicators are also starting to flash warning signs.

It could end up being the ultimate test of what matters more to the market: tighter supplies, or the lackluster demand picture. That will likely bring more uncertainty over the direction of prices — a complicated development for the Federal Reserve and the world’s central bankers in their ongoing battle against inflation.

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“It’s a very hard market to trade right now,” said Livia Gallarati, a senior analyst at Energy Aspects. “If you’re a trader, you are pulled between what’s happening at a macroeconomic level and what’s happening fundamentally. It’s two different directions.”

Read More: OPEC+ Shock Cut Aims to Make Oil Speculators Think Twice

One thing that is certain: A major shift of market control into the hands of Saudi Arabia and its allies has now been cemented, with huge implications for geopolitics and the world’s economy.

Investors have continued to reward US drillers for production discipline, making it unlikely that shale companies will ever again undertake the kind of disruptive growth that helped to keep energy inflation tame last decade. That leaves the oil market under the purview of OPEC+ at a time when some experts have predicted that demand is heading to a record.

“The surprise OPEC cuts have already triggered fears of a resurgence in inflation,” said Ryan Fitzmaurice, a lead index trader at commodities brokerages Marex Group Plc. “These renewed inflation concerns should only increase” in the months ahead, he said.

Here is an overview of what traders will be watching in the oil market.

Summer Demand

The timing of OPEC’s decision has struck an odd chord for many oil experts.

The production cuts don’t take effect until May, and much of the repercussions are likely to be felt in the second half of the year. That’s a time when oil demand typically reaches its seasonal peak, partly thanks to the busy summer driving season in the US. It’s also the point when China’s economic reopening is expected to start swinging into full gear, further underpinning demand.

Typically, OPEC would want to take advantage of that consumption burst by selling into the market as much as possible. Instead, the cut means the cartel is holding back. That’s sparking debate about whether the move will end up driving oil prices to $100 a barrel as demand surges, or whether, instead, the cartel and its allies are preparing for a recession-marked summer of tepid consumption.

“While OPEC+ cuts on the surface are generally seen as bullish, it does also raise concerns over the demand outlook,” said Warren Patterson, head of commodities strategy at ING. “If OPEC+ were confident in a strong demand outlook this year, would they really feel the need to cut supply?”

Moves in global fuel markets underscore the demand skepticism. While oil prices rallied, moves for refined products were less pronounced, shrinking margins for refiners across Europe and the US. In Asia, prices of diesel, a key refinery product, are signaling heightened slowdown concerns as timespreads shrink to their lowest since November.

Elevated Stockpiles

While US inventories have been declining, global inventories are still high.

In the first quarter, commercial oil stockpiles held in OECD countries were sitting about 8% above last year’s levels, according to estimates from the US Energy Information Administration. That’s a fairly sizeable buffer and a sign of the weakness in consumption that’s plagued the market in the past few months.

“You do need to chew through that overhang first before we can see we upside,” said Gallarati of Energy Aspects.

Russian Flows

Oil bulls have waited in vain for a Russian output cut promised for March to show up. The Kremlin said it would slash production by 500,000 barrels a day in March in retaliation for import bans and price caps imposed by “unfriendly countries.” But there’s been no sign of lower Russian output showing up in the one measure that matters to global crude markets — the number of barrels leaving the country.

Crude shipments from Russia’s ports hit a new high in the final week of March, topping 4 million barrels a day. That’s 45% higher than the average seen in the eight weeks before Moscow’s troops invaded Ukraine and has been boosted by the diversion since January of about 500,000 barrels a day delivered by pipeline directly to Poland and Germany.

Shale’s Production Discipline

It wasn’t long ago that there were two major players that oil traders turned to for direction over supplies: the Organization of the Petroleum Exporting Countries and the US shale industry.

At the time, OPEC and shale were locked in a battle for market share. It was a feud that helped to keep global oil prices — and energy-driven inflation — at bay for the better part of decade.

Then the pandemic hit, and with it an oil price rout that suffocated the shale industry. For the last three years, even as the market recovered and cash flow surged, companies have prioritized dividends and share buybacks over new drilling. It’s been a winning strategy. Since March 2020, the S&P 500 Energy Sector Index has surged almost 200%, outpacing the S&P 500’s nearly 60% gain.

Now, as calls for peak shale output gather pace, OPEC has one less factor to consider when making supply decisions.

That’s a sore spot for President Joe Biden, who was quick to downplay the impact of the decision by the cartel and its allies to cut output by more than 1 million barrels per day. Biden vowed after an initial production cut last year that there would be “consequences” for Saudi Arabia, but the administration has yet to follow through.

Read More: Investors Unloaded Saudi Arabian Bonds After Surprise OPEC+ Move

Futures Curve

Talk of $100 oil has been buzzing since the end of last year, but it seems like the can keeps getting kicked down the road. First, some analysts had predicted prices would reach that threshold in the second quarter of 2023. The view got pushed into the second half of the year, and now even some of the bigger bulls aren’t expecting the magic number to come into play until 2024.

The oil futures curve is reflecting those expectations. Prices for contracts tied to deliveries as far out as December 2024 and 2025 have rallied, even as benchmark front-month futures are starting to ease.

“The OPEC+ output cut certainly raises the possibility of $100 a barrel this year, although it is by no means a certainty,” said Harry Altham, an analyst at brokerage StoneX. “Demand-side weakness stemming from growth considerations is clearly taking a more prominent role.”

–With assistance from Julian Lee, Grant Smith, Chunzi Xu, Kevin Crowley and Mitchell Ferman.

 

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Unveiling the Reality of Canada’s FACE Loan for Black Businesses

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FACE Loan

In an effort to address economic disparities and promote entrepreneurship among Black communities, Canada introduced the Federal Black Entrepreneurship Program (FBEP) and the associated Black Entrepreneurship Loan Fund (BEFL). However, recent revelations have brought to light a shocking reality: the underutilization and obstacles faced by Black businesses in accessing the FACE (Funding for Black Entrepreneurship) loans. In this thought-provoking article, we delve into the numbers and uncover the challenges and experiences of Black entrepreneurs in navigating these loan programs. Through interviews with business owners, experts, and advocates, we shed light on the systemic barriers that hinder their success and explore potential solutions for a more equitable and inclusive lending landscape.

The FACE loan program was created with the intention of providing financial support and resources to Black-owned businesses. However, the reality has been far from the expected outcomes. Jessica Thompson, an economist specializing in racial disparities, states, “The FACE loan program was designed to address historical economic disadvantages, but the numbers reveal a significant gap between its objectives and the lived experiences of Black entrepreneurs.”

Black entrepreneurs face numerous hurdles when attempting to access FACE loans. A lack of awareness about the program, complex application processes, and limited outreach to communities in need contribute to low participation rates. Michael Johnson, a business owner, shares his frustration, saying, “It’s disheartening to see a program that was meant to uplift Black businesses fall short due to bureaucratic obstacles. Many of us struggle to navigate the application process and meet the stringent criteria.”

Systemic barriers and discrimination persist within the lending landscape, perpetuating the cycle of inequality. Dr. Maya Williams, a sociologist specializing in racial disparities, explains, “Structural racism and bias continue to disadvantage Black entrepreneurs. Discrimination in loan approvals, higher interest rates, and limited access to capital contribute to the challenges faced by Black-owned businesses.”

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The consequences of the FACE loan program’s shortcomings are far-reaching. Many Black-owned businesses struggle to access the capital needed for growth, expansion, and operational sustainability. Tanya Campbell, a business owner, emphasizes, “The lack of financial support hampers our ability to scale our businesses, hire employees, and contribute to the local economy. It perpetuates a cycle of limited opportunities and restricted growth.”

To address the disparities within the FACE loan program, experts and advocates propose several solutions. Improved outreach and community engagement, simplified application processes and tailored support services can increase access and awareness among Black entrepreneurs. John Stevens, a business consultant, suggests, “The government must invest in targeted initiatives that address the specific needs and challenges faced by Black-owned businesses, such as mentorship programs, financial literacy training, and capacity-building initiatives.”

Addressing the challenges faced by Black entrepreneurs requires collaboration and accountability from various stakeholders. Governments, financial institutions, and community organizations must work together to create an inclusive lending ecosystem. Mary Johnson, an advocate for Black economic empowerment, states, “Transparency, accountability, and ongoing dialogue between policymakers, lenders, and Black entrepreneurs are essential to drive meaningful change and ensure equal opportunities for all.”

The FACE loan program aimed to empower Black entrepreneurs and address economic disparities, but the reality falls short of expectations. The underutilization and obstacles faced by Black businesses in accessing FACE loans highlight the pressing need for systemic change within the lending landscape. By acknowledging and addressing the structural barriers, streamlining processes, and fostering collaboration, we can create a more inclusive and equitable environment where Black entrepreneurs thrive. It is through proactive measures, collective effort, and ongoing dialogue that we can dismantle systemic inequities and build a future where Black-owned businesses have equal access to the resources and support necessary for success.

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Oil Prices Climb As Default Fears Fade

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Crude oil began trading this week with a gain after President Biden and House Speaker Kevin McCarthy were reported to have reached a provisional agreement on raising the debt ceiling.

At the time of writing, Brent crude was trading at over $77 per barrel and West Texas Intermediate was changing hands at over $73 per barrel.

Debt ceiling negotiations have been a major factor for oil price movements in the past couple of weeks, mostly because of the apparent inability of Republicans and Democrats in Congress to strike any semblance of an agreement on how to increase the federal government’s borrowing power.

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According to early reports on the tentative deal, it involves flat spending over the next two years and the recycling of unused Covid funds.

Although such tense negotiations have been relatively regular in past years, they have eventually ended with an agreement, and default has invariably been avoided.

This historical evidence could have served to stabilize prices but it did not, and neither did mixed data about China’s recovery. On the one hand, PMI readings are showing an uneven rebound in economic activity, but on the other, demand for oil as evidenced by import rates, is going strong.

To complicate the picture further, OPEC+ is reportedly in two minds about what to do with its output at its next meeting.

According to reports quoting Saudi Energy Minister Abdulaziz bin Salman, he has hinted at another round of output cuts.

According to reports quoting Russia’s Deputy Prime Minister and top OPEC+ official Alexander Novak, the co-leader of the extended cartel is fine with production where it is right now.

Thanks to its recent gains, oil’s decline since the start of the year has shrunk from about 14% earlier this month to just 9% as of the start of this week, according to Bloomberg.

By Irina Slav for Oilprice.com

 

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U.S. debt-limit deal brings relief tinged by caution

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American equity futures posted modest gains amid cautious optimism the U.S. will avert a catastrophic default after the weekend’s tentative debt-ceiling deal. European stocks wavered in muted holiday-affected trading.

Contracts on the S&P 500 climbed about 0.2 per cent, while those on the Nasdaq 100 were up around 0.3 per cent, with trading set to end early for Memorial Day. The dollar, which has benefited from angst around the statutory borrowing limit, held Friday’s decline while Treasury futures were flat in the absence of cash trading.

The Stoxx Europe 600 index edged lower, with Spain’s benchmark underperforming after Prime Minister Pedro Sanchez called a surprise snap election following heavy losses for his party in regional and local elections Sunday. Volumes were about 60 per cent lower than usual as markets in the U.K. and some European countries remained closed for national holidays. SBB gained after the embattled Swedish landlord said it may look to sell the company. A gauge of Asia-Pacific equities rose, though Chinese shares slid closer to a bear market.

President Joe Biden and House Speaker Kevin McCarthy expressed confidence that their agreement to curtail spending and extend the borrowing limit will pass through Congress. But even assuming lawmakers seal the deal before the U.S. government runs out of cash in about a week, traders still have much to contend with — from the prospect of another interest-rate hike from the Federal Reserve to a likely deluge of bond issuance from the U.S. Treasury Department.

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“The obvious positive interpretation is that a negative tail risk is close to being taken off the table,” said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors. “With the distraction of the debt ceiling fading into the background, investors can now refocus their attention on the underlying fundamentals. One concern, though, is that the fundamental picture remains precarious.”

European bonds rose, with Germany’s 10-year yield falling about 11 basis points. Spain’s 10-year yield dropped by a similar amount.

Meanwhile, Turkey’s lira weakened after Recep Tayyip Erdogan won a presidential runoff election on Sunday, extending his time as the nation’s longest-serving leader and leaving investors looking for any signs he’ll start to relax the state’s tight grip over markets. The nation’s stocks benchmark gained.

Gold was flat on waning demand for havens, while as oil held onto most of Friday’s gains and Bitcoin climbed, reflecting a modestly buoyant tone.

‘UNCERTAINTY PERSISTS

The agreement struck by Biden and McCarthy is running against the clock given that June 5 is the date when Treasury Secretary Janet Yellen has said cash will run out. There is plenty in the deal that Democrats and Republicans won’t like.

“Uncertainty persists regarding the duration and severity of the ongoing earnings recession, and perversely, the near-term tightening of liquidity may worsen due to the government’s need to address its debt issuance backlog,” said Suzuki. “While the markets managed to avert an immediate crisis, the coast is far from all-clear just yet.”

The rate-sensitive two-year Treasury drifted Friday as traders considered how a debt agreement could play into the Fed’s path forward on interest rates. The two-year yield hovered around 4.65 per cent after a report on consumer spending showed the Fed still has more work to do to bring inflation back toward its target.

“Markets will have the liquidity hassles to deal with, as the Treasury will issue a deluge of bonds to restore its cash reserves,” said Charu Chanana, market strategist at Saxo Capital Markets. “Not to forget, the hawkish re-pricing of the Fed path that we have seen last week could possibly get firmer if we get a hot jobs print this week.”

Key events this week:

  • U.S. Memorial Day holiday. U.K., Switzerland and some Nordic markets also closed for holidays, Monday
  • Eurozone economic confidence, consumer confidence, Tuesday
  • U.S. consumer confidence, Tuesday
  • Richmond Fed President Thomas Barkin interviewed by NABE as part of monetary policy webinar series, Tuesday
  • China manufacturing PMI, non-manufacturing PMI, Wednesday
  • U.S. job openings, Wednesday
  • Fed issues Beige Book economic survey, Wednesday
  • Philadelphia Fed President Patrick Harker has fireside chat on the global macro-economy and monetary conditions, Wednesday
  • Boston Fed President Susan Collins and Fed Governor Michelle Bowman speak in Boston, Wednesday.
  • ECB issues financial stability review, Wednesday
  • China Caixin manufacturing PMI, Thursday
  • Eurozone HCOB Eurozone Manufacturing PMI, CPI, unemployment, Thursday
  • U.S. construction spending, initial jobless claims, ISM Manufacturing, light vehicle sales, Thursday
  • ECB issues report its May 3-4 monetary policy meeting. ECB President Christine Lagarde speaks at German savings banks conference, Thursday
  • Philadelphia Fed President Patrick Harker speaks on economic outlook at NABE’s webinar, Thursday
  • U.S. unemployment, nonfarm payrolls, Friday

Some of the main moves in markets:

Stocks

  • S&P 500 futures rose 0.2 per cent as of 9:56 a.m. New York time
  • Futures on the Nasdaq 100 rose 0.3 per cent
  • The Stoxx Europe 600 fell 0.2 per cent
  • The MSCI World index was little changed

Currencies

  • The Bloomberg Dollar Spot Index was little changed
  • The euro fell 0.1 per cent to US$1.0709
  • The British pound was unchanged at $1.2344
  • The Japanese yen rose 0.3 per cent to 140.22 per dollar

Cryptocurrencies

  • Bitcoin rose 1.3 per cent to $27,919.46
  • Ether rose 2.5 per cent to $1,901.1

Bonds

  • Germany’s 10-year yield declined 11 basis points to 2.43 per cent

Commodities

  • West Texas Intermediate crude fell 0.3 per cent to $72.43 a barrel
  • Gold futures were little changed

 

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