Published: July 5th, 2021
The much-awaited OPEC+ decision which ended in a stalemate sent anxiety through the market causing a surge in risk appetite. While Saudi Arabia and other members of the cartel meet on Monday, July 5, the markets may have to wait and see if the decision would act to stabilize the market sentiment.
The eagerly awaited OPEC+ decision on oil production, which was slated for Friday, July 2 came and went with not much agreement between the member states. It was pushed to Monday, July 5, when the members of the cartel would try to impose on Saudi Arabia to agree to increased oil production.
Saudi Arabia, a key member of the club, is not keen on implementing a slight boost in output from August despite an expected increase in global demand. The Middle East country is convinced that the rising COVID-19 cases call for a more measured approach to evaluating the global oil demand.
Lack of agreement between Saudi Arabia and the rest of the member states probably means the organization will not change the production regime during the meeting on Monday, July 5. However, should the cartel members agree on an increase, it would likely be negligible.
OPEC+’s ministerial panel is recommending an increase of 400,000 additional barrels per day with the market expecting an addition of about 500,000 barrels a day. Saudi Arabia’s hard stance has created a sentiment of tighter supply, which when combined with the growing global demand, is agitating oil bulls.
Already, the sentiment has pushed the price of U.S. crude past $75 per barrel. However, the good news according to a cross-section of market experts, is that oil prices may not consolidate above $75 since two major risk factors affect the actual oil rally.
The increasing fresh coronavirus cases and the ensuing new lockdown measures threaten the recovery of oil demand in the coming months. However, vaccinations seem to manage the significance of the hit.
Experts agree that the restrictions that some countries have recently implemented have already hurt demand. Besides, the election of Ebrahim Raisi as Iran’s president has complicated the prospects of a nuclear deal with the U.S. Though slim, the nuclear deal remains feasible.
If the deal sails through, it would open the door for Iran to pump its share into the market.
Under normal circumstances, Iran produces between four and six million barrels per day, which is what optimists hope for if the deal works. Such figures would easily dwarf the 400,000 increase that OPEC+’s ministerial panel is wresting over.
If the oil-producing nations fail to reach an agreement this coming week, the markets could witness a sustained rally in oil prices. However, the price peaks could present interesting opportunities for governments that are not afraid to swing the narrative in the opposite direction.
Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, a Swiss banking group that provides online financial and trading services, said that the bigger risk to increasing oil prices is that they fan inflationary pressures. Such coercion weighs on the operation costs of companies because it increases the price of raw materials while decreasing the demand for finished goods.
Inflationary pressures could also the ultra-supportive measures that the Federal Reserve and other central banks around the world have implemented to prop economies from the harsh effects of the coronavirus pandemic.
The Fed has staggered its decision for several months now despite market concern that inflation might get out of hand. Jerome Powell, the Fed chair, said in a recent address that the sustained dovish stance is the best option for the economy that has only embarked on the recovery path.
The market situations spurred by OPEC+ boosted the investor appetite for the entire week that ended on Saturday, July 3. The Dow Jones Industrial Average and the Nasdaq flirted with all-time highs, while the S&P 500 index began Q3 with a new record.
Meanwhile, the healthy U.S. jobs data gave a good indication of the sustained recovery the country is experiencing because of the Federal Reserve’s supportive policy. The U.S. created 850,000 new nonfarm jobs in June and surpassed the estimate for 706,000.
The figures are a significant increase from the 559,000 jobs created the previous month. Ozkardeskaya said the steady drop in unemployment claims pointed to a strong figure for June.
She said the high number is good for the market because it would sustain its upbeat mood. However, she was certain that even if the numbers had dropped below expectation, it would still not be motivation enough for the Federal Reserve to alter its dovish fiscal policy.
She said inflation is already dangling around a worryingly high figure of 5% and there is no indication that it has already peaked.
Meanwhile, wages increased 0.3% for June and 3.6% year-on-year, in line with the projections by experts. The unemployment rate surprisingly increased to 5.9% against an estimated 5.6%.
According to a report by the Labor Department, the impressive jobs growth was attributed to businesses responding to the demands of a rapidly recovering economy.
The economy recorded an increase in the rate of joblessness even though the participation rate of the labor force remains unchanged at 61.6%. A separate figure that measures part-time job holders because of economic reasons and discouraged employees fell acutely to 9.8%. Real unemployment shed 0.4% to stand at less than 10% for the first time since March 2020.
The market exuberance reported here earlier was a response to the good news. Futures of all major indexes inched modest gains during the opening session on Friday, July 2 despite the torpidity that often engulfs the markets just before a long holiday weekend.
Seema Shah, the chief strategist at Principal Global Investors, said the improvements and encouraging performances are all because of an all-out positive jobs report. She added that the improvements are an indication of the easing of labor supply constraints that the jobs market has experienced over the past few months.