The Daily Dose: Optimism Masks Pessimism

Via SeekingAlpha.com

The price for Brent crude oil was moving closer to $40 per barrel in early Tuesday trading in anticipation that parties to an OPEC+ agreement will extend curtailments. Iraq said it was steadfast in its support for the deal. Russia, one of the architects of the arrangement, has boasted of compliance. Economic indices in Europe, meanwhile, continued to show signs of modest recovery, with the Austrian employment reading coming in better than the last. But the optimism may be overblown as the United States implodes. US President Trump on Monday called for the use of military force on its own citizens and some analysts are now openly questioning America’s role as a superpower. That seriously undercuts any faith in the American economy and its global influence in general.

After a surprise 8% gain in the global benchmark Monday, Brent was up another 2.3% or so as of 8 a.m. ET to trade at $39.13 per barrel. Equities and commodities both seem detached from reality, however, as trade threats and political crises cloud the end to the quarantine economy.

In a statement on Twitter, acting Iraqi Oil Minister Ali Allawi said one of the world’s largest crude oil producers was on board with further restraint among OPEC members.

“Despite Iraq’s severe financial constraints, we’re addressing technical issues that will allow us to further reduce oil output,” he stated. “We remain committed to the OPEC+ deal, and to doing our part towards ensuring a stable and secure global energy market.”

Data from the Russian Energy Ministry, meanwhile, show the country is close to its target level under the OPEC+ arrangement. Russia is obligated to some 2.5 million bpd in cuts out of the collective 10 million bpd. May production was around 8.7 million bpd, down from the 11.4 million bpd for April. The price for Urals, the Russian benchmark, has enjoyed a premium against dated Brent and remains above the expectations outlined by the country’s central bank governor.

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Compliance and support levels would suggest parties to the OPEC+ agreement, which has been supported by cuts – both voluntary and market-driven – from parties outside the core OPEC group, could be extended. The agreement as drafted was only temporary, with restraint easing in gradual fashion through year’s end.

Taken at face value, Russia compliance and Iraqi support are positive for crude oil prices. But Russia before has balked on long-term restraint, arguing it overshoots temporary demand destruction in the quarantine economy. Russian production in April, meanwhile, was exceptional and data show that Iraq is already shirking on its commitments. Abhi Rajendran at Energy Intelligence adds the Brent structure is moving into backwardation. Contango, where the front-month is trading higher, indicates an oversupplied market. Backwardation means just the reverse.

“Brent about to touch $40 and front-month in backwardation,” he said on Twitter. “This certainly feels like the market has gotten a little ahead of itself.”

A steady rally for equities and a strong recovery for the price of crude oil is detached from everyday reality. Millions of Americans are without a job, European manufacturing indices are behind the curve and governments big and small are pouring cash on the economy to keep it from collapsing.

A report from the non-partisan Congressional Budget Office in Washington DC finds the US economy is expected to rebound from its coronavirus doldrums by the second half of the year and the labor market is expected to “materially improve.” The recovery, however, will not be enough to offset earlier losses.

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“Compared with their values two years earlier, by the fourth quarter of 2021 real GDP is projected to be 1.6 percent lower, the unemployment rate 5.1 percentage points higher, and the employment-to-population ratio 4.8 percentage points lower,” the report read. “Inflation and interest rates on federal borrowing will remain relatively low because of subdued economic activity and weak labor market conditions through 2021.”

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.