20141128 – OPEC WEAK OR SMART?

Well the OPEC meeting came and went and there will be no agreement on a cut in production. There are two ways of looking at this.. 1) OPEC is weak and the cartel is no longer the worlds marginal supplier of oil 2) The Saudi’s are long term strategic geniuses. Nothing needs to be said about option 1, but the reason I pose option 2 is that the cost of producing all that shale gas is probably in the $65 – $75 price per barrel range. If that’s the case then we are approaching levels which might be uneconomic in the US, so why not cause them some pain? It may be that we are already close to base levels for the price of oil, it would be an odd choice to make a stand here. Perhaps I give the cartel too much credit, but it does merit further investigation. Another interesting question that could be posed by recent events… the tax share of pump prices in the US is negligible to say the least, especially in comparison to the 75% we see in major European countries, even Turkey’s tax take from a litre of petrol is around the 70% mark. I’ve often seen this as almost indefensible on the part of the United States, which leads me to my point… we’ve just seen a near 30% decline in pump prices and the US has a huge fiscal deficit… would this not be a great time to increase the tax share of pump prices while the consumer is getting substantial relief from cheaper oil? At one stroke this would probably solve the fiscal issues in the US, and why would the consumer grumble.. pump prices would still be lower than a few months back? President Obama, why don’t you do this? I’m not sure there’s much that can damage your approval ratings anyway, so why don’t you do something for your legacy? For the environment you claim to care about, and for the future Americans who’ll have to pay back all that government debt? Common sense right? There are many developing economies who could phase out subsidies at this point as well, but to my knowledge India is one of the few who’ve done this. Well done Mr Modi, Nigeria are you watching?


Back to the currency markets, not surprisingly the oil rich currencies didn’t take the OPEC news too well yesterday. For example USD/RUB made new record highs yesterday and USD/MXN also made new year to date highs. Expect continuing depreciation pressures for currencies with high exposure to oil production.


Overnight the inflation data coming out of Japan was disappointing if you’re a board member of the Bank of Japan, but only slightly so, with slightly lower growth in prices, albeit largely what was expected. The unemployment rate was slightly lower though, but weaker than expected retail sales and slower industrial production are a counter to that happy employment news. Japan is definitely not one of the shining lights in the global economy at the moment, that’s for sure.


Speaking about unemployment rates, Germany published its numbers yesterday, which were in line with expectations. And more importantly Eurozone sentiment data, both for businesses and consumers was somewhat better than forecast. Not bad given all the doom and gloom! Unfortunately retail sales in Germany have come out this morning and while expected, it does show a bit of a decline, we can only hope that German consumers will get into the Christmas spirit in the coming weeks. At least the Spanish and Swedish retail sales data which have also come out this morning has been more positive… at least in absolute trend terms. However while Swedish data was better than expected, the Spanish data was a bit worse.


The dollar gradually strengthened yesterday against the majors. As I mentioned, we were at levels where a return to trend in EUR/USD and GBP/USD was possible, but USD/JPY showed signs of a more assertive dollar as well, something I had less confidence in (see yesterday’s blog). As they say, a high tide carries all boats. We remain unclear about whether this is just a ranging move with a continuing period of consolidation, for now we would need some sort of impulsive move to signal the dollar trend is in play again. Until then, I prefer to monitor the situation with a lower degree of confidence in the near term path than I would generally like.


Today is likely to be a fairly slow day, there is an assortment of macro data coming out, but nothing of huge consequences. Furthermore our cousins across the pond are likely to be sluggish in the aftermath of all that turkey stuffing yesterday. Volumes are likely to be less than normal, so of course there will be an outside chance of non-standard moves, but I’m not anticipating much excitement among the major currencies, and probably expect continuing pressure on some developing market currencies… especially those belonging to the more resource blessed economies.

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