The much-awaited OPEC+ decision has been postponed to today, and is now even more awaited, as Saudi Arabia, which is a key member of the oil producers’ club doesn’t seem willing to move on with a slight boost in production from August, whereas the global demand is still expected to grow despite the rising Covid cases.
The disagreement between Saudi and the rest of the cartel probably means there will be no change in OPEC’s production regime this week, or if there is, the increase will likely be smaller than expected, with 400’000 barrels of additional supply per day recommended by OPEC+’s ministerial panel and less than the half-a-million rise we expected.
Prospect of tighter supply combined with growing global demand is now fueling the oil bulls, sending the price of US crude above the $75 per barrel. But oil prices may not consolidate above $75pb, as there are two major risks to the actual oil rally.
First, the rising Covid cases and the new lockdown measures are a growing threat to the oil demand recovery in the coming months. Although the vaccinations are thought to temper the size of the hit, the restriction measures that are being put in place already hurt demand, and the prospects of demand.
Second, Raisi’s election in Iran made a nuclear deal with the US look more complicated, yet the possibility of a deal is still alive. If the nuclear deal goes through, Iran is expected to pump some 4 to 6 million barrels per day into the market, dwarfing the little half-a-million increase that OPEC+ is fighting over.
Therefore, if there is no change in OPEC+ production regime this week, we could see a further kneejerk rally in oil prices, yet price peaks could be interesting opportunities for those willing to take the train in the opposite direction. Because there is one more risk to the rising oil prices: higher oil prices fan the inflationary pressures, weigh on companies’ operating costs by increasing the raw material costs, decrease demand, and also threatens the Federal Reserve (Fed) and other central banks’ ultra-supportive monetary policies.
But let’s forget about the Fed worries for a minute. The investor appetite remains strong this week. The Dow and Nasdaq flirts with the all-time highs, while the S&P500 kicked off the second half of the year with a new record.
Today, the US jobs data should give a further insight on how well the US labour market is doing in reaction to the Fed’s supportive policy. The US economy is expected to have added some 700’000 new nonfarm jobs in June, versus 559K printed a month earlier. Given the steady decline in weekly unemployment claims, we could expect to see a strong figure, but whether it’s stronger than 700’000 is yet to be seen.
The market clearly needs a strong figure to hold on to its upbeat mood, as a surprise weakness in jobs figures wouldn’t get the Fed to do more, when inflation is hovering around a worryingly high 5% and it’s not even sure that it’s a peak. Also, another important thing here is the average earnings, which are expected to have risen to 3.7% in June – to cope with the inflationary pressures, from 2% printed a month earlier. The fact that many people are now getting new jobs in an environment of rising inflation makes the wages growth even steeper. And of course, if an eventual fall in oil prices could temper inflation, the higher wages are here to stay.
Still, strong jobs data should keep the US equities and the dollar upbeat.
For gold, there is no better combination than higher inflation and low, and sliding US yields to boost the bulls’ appetite. Yet, the inflation-boosting factors are the same than the appetite-boosting ones, and the returns on risk assets are so appetizing that gold is completely left out of the race during the actual rising inflation period. Therefore, gold will likely remain offered near the $1800 per oz, if we don’t see an important disappointment in economic data and an important erosion in global risk appetite.
