Month: January 2022

In what may have been one of the shortest meetings in OPEC+ history, the oil cartel and its allies agreed to restore more halted production as the outlook for global oil markets improved, with demand largely withstanding the new coronavirus variant.

The 23-nation alliance led by Saudi Arabia and Russia approved another 400,000 barrel-a-day increase scheduled for February at a meeting on Tuesday, according to a statement published after today’s meeting. The group is sticking to its plan to gradually restore output halted during the pandemic after its analysts predicted a smaller surplus this quarter than previously expected. The full statement is below:

24th OPEC and non-OPEC Ministerial Meeting No 02/2022

Following the formal conclusion of the 23rd OPEC and non-OPEC Ministerial Meeting (ONOMM) held via videoconference on Thursday December 2, 2021, and in view of current oil market fundamentals and the consensus on its outlook, the OPEC and participating non-OPEC oil-producing countries:

1. Reaffirm the decision of the 10th OPEC and non-OPEC Ministerial meeting on 12th April 2020 and further endorsed in subsequent meetings including the 19th OPEC and non-OPEC ministerial meeting on the 18th July 2021.

2. Reconfirm the production adjustment plan and the monthly production adjustment mechanism approved at the 19th OPEC and non-OPEC Ministerial Meeting and the decision to adjust upward the monthly overall production by 0.4 mb/d for the month of February 2022, as per the attached schedule.

3. Reiterate the critical importance of adhering to full conformity and to the compensation mechanism taking advantage of the extension of the compensation period until the end of June 2022. Compensation plans should be submitted in accordance with the statement of the 15th OPEC and non-OPEC Ministerial Meeting.

4. Decided to hold the 25th OPEC and non-OPEC Ministerial Meeting on 2 February 2022.

The decision was fully priced in, and the price of Brent rose to session highs, reversing all SPR-release losses as global fuel consumption continues to recover from 2020’s collapse as rising traffic and factory activity across key Asian consuming countries and dwindling crude inventories in the US boost oil prices..

AS Bloomberg notes, OPEC+ had already restarted about two-thirds of the production it halted in the early stages of the pandemic. The alliance is seeking to drip-feed the remainder at a pace that will satisfy the recovery in fuel consumption — and stave off any inflationary price spike — without sending the market into a new slump.

That said, there are questions about whether OPEC+ will can actually deliver the full monthly increment, given the recent struggles of some members such as Angola and Nigeria to hit their production targets. Just 130,000 barrels a day of additional OPEC+ crude are likely to hit the market in January, followed by 250,000 barrels a day in February, according to Amrita Sen, chief oil analyst and co-founder at Energy Aspects Ltd.

Meanwhile, while OPEC+ expects a supply glut to emerge this month, it appears to be smaller than previously thought. The increasing price premium of near-term Brent crude futures over later-dated contracts suggest the market remains tight. Production will exceed demand worldwide by 1.4 million barrels a day in the first three months of the year, the group’s Joint Technical Committee concluded on Monday, compared with 1.9 million in its previous assessment.

The cartel isn’t concerned about adding barrels at a time of surplus because fuel inventories are currently at low levels and typically replenish during the seasonal demand lull, according to a delegate. Stockpiles in developed nations were 85 million barrels below their average from 2015 to 2019 as of November, according to the JTC.   At a separate and very brief online meeting on Monday, OPEC ministers appointed veteran Kuwaiti oil executive Haitham Al-Ghais as its new top diplomat, to assume the post in August after the term of its current Secretary-General Mohammad Barkindo expires.

By Stefan Koopman, Senior Macro Strategist at Rabobank

Happy New Year from RaboResearch! We wish you all a healthy, happy and successful year, and hope that you will stay with us throughout 2022.

The first trading day of this year was a rather quiet one in terms of news, with relatively thin liquidity and significantly below average volumes as markets were closed in Japan, China and in the United Kingdom. Elsewhere in Europe and in the United States, investors picked up more or less from where they left off in 2021, meaning that the risk mood was generally positive. Bonds slumped and equities reached fresh record highs. The MSCI World index rose 0.3%. This is, of course, far from any reliable indication of how the rest of the year is going to play out: the global index rose 0.7% on the first day of trading in 2020, while it fell 0.7% as 2021 commenced. It’s just another day, really.

That said, it is a new year, P&L’s are back at zero, so the financial punditocracy is invited to identify the risks in store for 2022. This typically culminates into an extended list of “known unknowns”, which, by its very definition, isn’t particularly revealing. However, the impact of this type of risk is still potentially large, as long as it is not fully priced. The most prominent one is the Fed overcompensating for its fears of a looming wage-price spiral, which could push the global economy back into a recession. But what about the increasingly tight and demanding labor markets; or the numerous scenarios in which distorted consumption patterns, supply-chain snarls and inflationary pressures don’t normalize anytime soon; or China continuing to fight last years’ war as it obstinately pursues a zero-Covid policy; or the simultaneous reversal of fiscal stimulus in *all* developed economies; or a Europe without energy or direction just as Merkel breaks in her new hiking boots? And what about Russia, Ukraine, Iran, Turkey, Afghanistan or climate change? Let alone the unknown unknowns… the commentariat hardly ever gives those a mention ;-)!

The overall consensus is that global growth will ease, that the easy money has already been made, and that the expected return per unit of risk moderates. We forecast global GDP growth for 2022 at 3.9%, down from 5.6% last year, as the low-hanging fruit of re-opening has been consumed and supply bottlenecks and higher prices for tradable goods and commodities curb discretionary spending. That said, although global inflation remains elevated well into 2022, we remain of the view that a return to wage-price spirals in major economies seems improbable and that price pressures will weaken (or reverse?) without central bank interventions once market forces are able to ease supply chain problems. That would mean inflation is *transitory* after all.

So long as inflation does indeed appear to be receding, global bond markets should be able to weather some modest monetary policy tightening. In fact, as our Rates team has outlined time and again, we do believe that central bank efforts to tackle supply-side price pressures by curtailing demand through tighter financial conditions is only likely to strengthen the already clear market message that inflation is set to retreat from its current lofty levels over the longer run. Even though US inflation accelerated to a 40-year high of 6.8% in November, this helps to explain the notable flatness of the Treasury curve even before policy normalization has commenced. The economy may not have the capacity to sustain a “normal” policy tightening cycle if demand is indeed softening with uncustomary rapidity. This is what makes 2022 particularly interesting: after two very unusual years, which didn’t remotely resemble anything of a regular business cycle, it might be the year that finally reveals the underlying health of the economy.

Day ahead

Earlier this morning, China’s Caixin Manufacturing PMI came in at 50.9 in December, up from 49.9 in November and reaching its highest level since June. The survey notes that output rose at its quickest rate in the past year as supply constraints and inflationary pressures eased. This chimed with the latest batch of manufacturing PMIs in Europe and the US, which indicated that supply bottlenecks and delivery times improved. That said, in China, future output expectations hit its lowest point since April 2020 as firms worry about the potential shock to supply chains of Covid-19 outbreaks. Note that the one in the city of Xi’an –a major industrial hub– caused authorities to enact sweeping restrictions on a scale rarely seen since Wuhan. 

Our commodity strategist Ryan Fitzmaurice notes that oil markets are gearing up for what is likely to be an exciting year with expectations for both oil supply and demand to grow meaningfully in the months ahead. In fact, global oil demand is widely expected to reach new all-time highs above the 100mb/d mark in 2022, while the supply-side will largely be dependent on OPEC and its allies. The group will decide today on output levels for February. A continuation of the current pact, which is to increase oil output by 400kb/d per month until pre-pandemic levels are achieved, is to be expected. It is however worth noting that even if the group agrees to increase production quotas, realized output might underperform given recent production issues in Libya and Nigeria. 

The National Bank of Poland will probably be the first central bank to raise interest rates this year. The consensus sees it raising its benchmark rate by 50 bps to 2.25% at today’s MPC as it seeks to curb inflation, which is expected to have exceeded 8% y/y in December. Recall that the benchmark rate was just 0.1% in September. 

In the US, the focus will be fully on the ISM Manufacturing report. The headline and the prices paid indexes may grab all attention, but it’s worth keeping an even closer eye on the data and anecdotal evidence on new orders, inventories and deliveries to see whether the demand-driven yet supply chain-constrained environment indeed starts to balance.

The JOLTS report is also up for today. This one doesn’t get much love from investors, as it lags the nonfarm payrolls more than a month, but it really is a treasure trove of labor market data. It is expected that the November figures show that job openings (11.05mn expected) continue to outstrip unemployment (7.4mn), which indicates that the labor market is unusually tight and the unemployment rate is set to decline further.

Newbie NYC Mayor Eric Adams has already promised to keep 1M+ students attending classes in person at the Big Apple’s public schools. Meanwhile, Wall Street megabanks  – including JPM and Goldman Sachs – are delaying their employees’ return to the office.

Because of all this, Mayor Adams has said the city’s vaccination requirements could be modified to move the next deadline to April.

“We will do an analysis around April based on the Department of Health and Mental Hygiene and see if we want to mandate them,” Adams said in a Monday interview on Bloomberg Television’s “Balance of Power with David Westin.”

Right now, public sector employees are required to be fully vaccinated. A vaccine mandate for private-sector workers went into place on Dec. 27, with employees required to get their second dose within 45 days or they won’t be allowed to come to their workplaces.

Adams, who became the city’s 110th mayor on Saturday, also said he was urging banks and other businesses who are letting employees work from home during the winter COVID spike to bring those workers back to the office instead. 

Many are worried that NYC’s critically important financial ecosystem could face a serious threat in the coming

“That accountant from a bank that sits in an office, it’s not only him, it’s our financial ecosystem. He goes out to the restaurant. He brings the business travel, which is 70% of our hotel occupancy. He participates in the economy,” Adams said.

At least Mayor Adams is willing to admit that the Big Apple needs higher office occupancy rates to return to the thriving.

“They cannot remotely do their jobs. I need companies back open and operating. You cannot run a city like New York on 30% occupancy in buildings,” Adams said.

That’s something to keep in mind.

Authored by Charles Hugh Smith via OfTwoMinds blog,

What seemed so permanent for 13 long years will be revealed as shifting sand and what seemed so real for 13 long years will be revealed as illusion. Magical thinking isn’t optimism, it is folly.

Predictions are hard, especially about the future, but let’s look at what we already know about 2022. 

Viewed from Earth orbit, 2022 is Year 14 of extend and pretend and too big to fail, too big to jail and Year 2 of global supply chains break and energy shortages.

The essence of extend and pretend is to substitute income earned from increases in productivity–real prosperity–with debt–a simulation of prosperity –that doesn’t solve the real problems, it simply adds a new and fatal problem: since productivity hasn’t expanded across the spectrum, neither has income or prosperity.

All that happened over the past 13 years is that debt–money borrowed against future productivity gains and energy consumption–funded illusions of prosperity in all three sectors: households, enterprise and government.

The explosion of debt and interest due on that debt could not occur if interest rates still topped 10% as they did 40 years ago in the early to mid-1980s. We couldn’t add tens of trillions of dollars, yen, yuan and euros in new debt unless interest rates were pushed down to near-zero (for the government, the wealthy and corporations only, of course–debt-serfs still pay 7%, 10%, 15%, 19%, etc.)

This monetary trick was accomplished by making central banks the linchpin of the entire global economy as central banks created “money” out of thin air and used the currency to buy trillions in government and corporate bonds, artificially creating near-infinite demand which then drove the rate of interest into the ground.

Without continuous injections of more “free money” and suppression of interest rates, the market–oh, the horror!– would re-assert its price discovery mechanisms which tied interest rates to risk. The cost of money is causally tied to the perceived security of the currency (i.e. risk) and the interest earned when lending it out (i.e. return or yield).

The $100 USD bill (good old Benjamin) protected from the tropic environment in a plastic bag will have more value than a 100 peso bill in any jungle on the planet because of the general perception that the Benjamin will still have considerably more value tomorrow, next month and even next year than the 100 peso note.

If risk is perceived to be higher, then interest rates must compensate for this risk by being much higher for risky currencies, borrowers and investments.

The central bank-engineered suppression of interest rates has destroyed the market’s core mechanism of causally linking risk and the cost of money. Near-zero interest rates implies near-zero risk, and so this entire 13-year spree of suppressing the cost of money has institutionalized moral hazard, the disconnect of risk and consequence.

The ultimate artifice of extend and pretend is that risk has been vanquished: over-extended and over-leveraged borrowers can always roll over their existing debt and borrow more as ever-lower rates of interest, in effect paying interest with new debt.

Since risk is essentially zero, then why not make use of this opportunity by gaming the system? The big players who broke the laws against insider trading, selling securities designed to fail, etc., found that the global Empire of Debt viewed prosecuting financial crimes as potentially upsetting, so not only did risk fall to zero, so did the consequences of fraud, collusion and malfeasance.

And since the bigger players had unlimited access to central bank credit, their bets quickly became so risky and so large that the entire financial system became fragile and vulnerable to cascading collapse. Central banks and state treasuries were forced to bail out the most egregious criminal firms and ignore the criminality of individuals in those firms, institutionalizing too big to fail, too big to jail.

The truly interesting thing here is that the stability of any system depends on precisely what central banks have extinguished: a transparent market that prices risk within the constraints of consequences. Over the past 13 years, the invulnerability and rewards bestowed on those who borrowed to the hilt and then borrowed even more and put all the central bank-issued “money” on leveraged bets has trickled into the consciousness of retail punters, individuals, households and small-scale gamblers, oops, I mean investors.

With real productivity and earnings stagnant and all the gains of gaming the central bank’s suppression of risk flowing to the top 0.1%, the commoners have now followed the Nobility into the casino. Wealth is no longer perceived as flowing from productivity but from speculation and the leaping from one asset bubble to the next.

Since increasing productivity cannot be made risk-free while speculation can be made to appear risk-free for a time, all the money and talent has flowed into speculation. The real world rots away as everyone pursues the incentives that the central bank regime have created to game the financial system and speculate as wildly as you can because there’s no longer any risk of any asset ever declining ever again.

The central bank regime incentivized speculation by rewarding those who borrowed and leveraged the biggest bets. In the central bank casino, everyone who bets on asset bubbles expanding to the sky is a winner. Anyone who took real-world risks by investing in the production of goods and services was a loser.

I often refer to first-order and second-order effects, and that’s the story that will be told in 2022 with explosive results. First-order effects: actions have consequences. Second-order effects: those consequences have consequences.

The first-order effects of central banks’ suppression of rates and risk were spectacularly rewarding: assets soared to ever higher highs and enough of the flood of new credit reached the masses to spark an orgy of consumption paid not by earnings and productivity but by debt. Corporations didn’t boost productivity, they borrowed billions and bought back their own shares, reducing the float and thereby generating higher profits per share.

But the new incentive structure generated by this destruction of market dynamics destroyed not just price discovery of risk, it also destroyed the foundation of true prosperity: investing in increasing productivity rather than in speculative gains.

The Federal Reserve managed to suppress interest rates but it doesn’t control risk or consequence. On the systems level, all that central banks accomplished was to transfer all the risk piling up as a consequence of their incentivizing of speculation to the entire financial system itself.

By incentivizing speculation and feeding the belief that assets can never decline, the central banks have implicitly made a promise they cannot keep: consequences have been extinguished along with risk. One consequence of incentivizing speculation and backstopping the biggest players’ bets is that the biggest players have garnered the vast majority of the gains (see chart below). This vast differential has generated unprecedented wealth inequality, a concentration of wealth in the hands of the few at the expense of the many that has completely corrupted the nation’s political and social orders.

2022 is the year that the second-order effects come home to roost: all the risk that has been transferred to the financial system as a whole will generate consequences the Fed and other central banks are unable to control. The stupendously toxic incentives to speculate will generate consequences the Fed and other central banks are unable to control. The stupendously toxic wealth inequality will generate consequences the Fed and other central banks are unable to control.

The hubris and magical thinking of the central bankers has infected the entire populace, the majority of whom now confuse magical thinking with optimism. The belief that central banks can extinguish risk and consequence and the second-order effects of those consequences is magical thinking. The belief that asset bubbles will keep expanding because of the omnipotence of central banks is magical thinking. The belief that prosperity is the result of shifting bets from one gaming table to the next is magical thinking. The belief that central banks have god-like powers and nothing can limit their power is magical thinking.

The funny thing about system dynamics is they don’t respond to what we like, want or believe. Believing that central banks can make the financial system and economy do whatever they want doesn’t mean they actually have that power. Believing that second-order effects have been extinguished doesn’t mean they’ve actually been extinguished.

What will surprise us in 2022 is the exposure of central banks’ limits of power and the explosive consequences of second-order effects. What seemed so permanent for 13 long years will be revealed as shifting sand and what seemed so real for 13 long years will be revealed as illusion. Magical thinking isn’t optimism, it is folly.

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My new book is now available at a 20% discount this month: Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $8.95, print $20). If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.