There was a broad recovery in oil prices this week. American WTI (West Texas Intermediate) bounced back above $34.00 USD (United States Dollar) and international priced Brent moved above $37.00 USD. The problem for investors remains oversupply.
The world will use about 95 million barrels of crude and other liquid fuels a day in 2016. This is an increase of 1.2 million from last year. The problem remains that there will be a surplus production of well over 1 million barrels a day.
Even though declines in oil output are predicted to continue in the United States it will be counter balanced by increased production in both Brazil and Canada. However, the major contributor to global glut in crude in 2016 will be Iran. As most international imposed sanctions have now been lifted, the Iranians are expected to ramp up production by hundreds of thousands of barrels a day.
A rush of Asian and European investment is now entering Iran. This will help the country to boost exports of oil throughout the year. Individual American sanctions still in place are hampering investors from the United States.
Unconventional oil resources are greater than conventional ones.
The only real way to deal with the abundant supply in oil at this time would be to have Saudi Arabia cut production. That would necessitate a reduction in their global market share of sales.
The Saudis are unwilling to make this sacrifice at this time. They made a conscious effort in late 2014, to regain market share. It would be difficult for them to change course now.
The increase in energy prices is allowing a rally to take place in American and world markets. The Dow Jones Industrial Average has advanced 2.62% this week from the low on March 01, just above 17,000 at the time of this posting.
Last time it was above the 17,000 benchmark was on January 06th. The index is up 8.17%, since the yearly low in oil prices ($26.05 USD) reached on February 11th. The exchange is still down 1.22% for 2016.
In relation to commodities, precious metals are moving higher across the board this week. Gold is now selling above $1,260 USD an ounce and silver is selling well above $15.00 USD again. Platinum has hit $960.00 USD and palladium is approaching $550.00 USD.
World leaders at the summit.
The G20 meeting ended without a real plan to increase growth among the 20 leading economies of the world. The group admitted that monetary policy alone, cannot return the global economy to growth. There is a renewed call for fiscal and structural reforms, but no defined program.
In the United States 242,000 jobs were created (230,000 in the private sector) last month. This will permit the official unemployment rate to remain at 4.9%.
Although immediate recessionary fears in the United States have retreated somewhat, it will still be difficult for the Fed to raise interest rates substantially this year. The reason is the global economy is still slowing down even further.
U6 unemployment in the United States dips to 9.7%, the lowest rate since 2008. This includes those workers who are jobless as a result of discouragement and those who are working part time for economic reasons. That is they are unable to secure full time employment. Labor participation inched up to 62.9%. It is still at a generational low.
Wages in the United States on the other hand dropped month to month, for the first time since late 2014. Average hourly compensation dipped 0.01%.
GDP (Gross Domestic Product) growth for the United States was revised up from 0.07% in the 4th quarter to 1%.
Bank of Japan headquarters.
In Asia, Japan remains in recession. The Bank of Japan announces it is not considering a further move into negative interest rates at this time.
The hope is that qualitative and quantitative easing along with below zero interest rates, will soon bring inflation back to a yearly rate of 2%. That would in turn, move the economy out of recession.
As a bellwether for East Asia, it has been announced that the Chinese territory of Macau witnessed a decline in GDP by 20.3% in 2015. There was a 14.4% contraction in the fourth quarter alone. The dismal news is the result of a dramatic drop in gambling revenue for the city state.
Much of it is being caused by slowing growth in mainland China and a new Chinese government sponsored crackdown on corruption.
In China itself, the country observed a downing of their credit status by Moody’s Investors Service. The investment ranking went from stable to negative. The explanation for the change was prompted by a continuing fall in foreign exchange reserves and escalating easing in fiscal policy.
At Aa3, it is still seven steps from junk status. Therefore, it did not create a panic among investors.
In related news, China cut the central bank reserve requirement this week again, by another 50bps (basis points). It is the fifth time in little over a year, that the rate has been cut. The new benchmark is now an even 17%. The last reduction took place in October.
Sketch of Kim Jong-un
Also in the region, North Korean leader Kim Jong Un has ordered the military in the country to change the current status to preemptive attack mode. He went further in getting the nation ready to use nuclear weapons if the need arises.
These recent movements were likely in response to the new sanctions imposed by the United Nations. World leaders had pushed for new trade restrictions on the isolated regime because of the recent provocative nuclear and missile tests.
North Korea already launched a number of short range missiles in defiance of the United Nations earlier in the week. These short range devices posed no real military threat .
Equities in India jumped this week by the most in two and a half years, after the government announced it was planning on staying within the new deficit target of 3.5% of GDP this year.
The sentiment is that it will allow the Reserve Bank to lower rates. This positive movement might well entice more foreign investment, which was in retreat last year.
Australia has one of the world’s most highly urbanized populations with the majority living in metropolitan cities on the coast.
On a positive note, Australia is experiencing a spurt in growth. GDP grew 3% in 2015 above the 2.5% projected, as a result of the economic expansion in the 4th quarter.
Although some analysts take it as a sign that the worst of the global rout in commodity prices is over, it was more due to the re-balancing in the domestic economy. Investment has been redirected from mining to the service sector.
The European Union, supposedly has reached an agreement with Turkey to return non-Syrian refugees from Greece back closer to their country of origin. If the understanding actually leads to repatriation of migrants from the Middle East, it will be the first step in stabilizing the current chaotic situation.
Mauricio Macri
More evidence of deflation in the Euro-zone. The slowdown in business activity and hiring is contributing to further price declines. It makes further monetary easing by the European Central Bank, more likely next week. The 2% inflation target remains elusive for now.
In Latin America, Argentina is moving to end a 15 year struggle after being forced to leave the international credit markets. The country under the new presidency of Mauricio Macri has agreed to a payout of 4.65 billion USD for the largest holdouts of their debt.
It is 75% of the true amount owed and is seen as a victory for the new administration. The government there plans to issue up to $15 billion USD in new sovereign debt, as early as April.
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