OPEC,Kaplanandpredictionfollies

There are lot of important data points which the market watchers are keenly awaiting as we enter into the second half of the week. The first one is the result of the OPEC meeting which is due today, then the initial jobless claims and continuing claims which will also be out today, last but not the least tomorrow will be the US NFP day. As the new month has started lot of PMI data will also start coming in. On the job front a precursor to NFP is the ADP employment report which came yesterday and showed better than expected job additions in the US. The BLS published NFP data is expected to show a headline number of 675k tomorrow.

There was an interview by Dallas Fed President Robert Kaplan yesterday which was an interesting watch. Kaplan represents the Dallas Fed in FOMC. As currently he is not a voting member his views are not as market moving as some of the voting members. But given that he is part of the committee discussions any peep into his thought process is worth having. Kaplan opined that the bond purchases sooner rather than later as it allows some headroom to manage the policy later. The only concern for him remains the new covid variant of Delta plus which is still the unknown piece of the puzzle.

Now Kaplan might be a non-voter, but he represents the Dallas Fed which is in Texas, the US oil production epicentre. As we wait for the OPEC production decision to come to see where the oil prices are headed Kaplan’s remarks gave some hint. When the interviewer asked that how high does he see the oil prices going and is 100$ a barrel a reality. Kaplan replied that this time round the ability of the shale gas producers to quickly ramp up production is limited as most of them are facing capital crunch. In the past we have seen that whenever the oil prices rose it was counterbalanced by US shale production. However, some development on the US Iran front can obviously provide some of the counter to high prices.

What is interesting to note here is that how deeply coupled the world is. A production cut by OPEC, move of capital towards more sustainable ESG investing, a geo political deal between the US in the Middle East, a demand increase as the economy reopens, all of this will impact the oil prices and then filter its way through the bond markets of import heavy nations. Readers would remember that around April and May last year the oil prices had once traded in negative for the near-term delivery contracts. As the demand crashed due to covid lockdowns there was no way to take the delivery of the oil and it just got dumped. On 18^th April WTI oil prices plunged from 17$ / bbl to negative 37 $/ bbl. You paid someone to take your oil!

A nice though biased read here would be journalist Dilip Hiro’s 2006 book The Blood of the Earth which traces the history of oil and the geopolitics surrounding it. As mid 2000’s was the time of the US Iraq war, shale production was still some time away and the EV battery revolution was still in its infancy, the author takes too much liking for the “peak oil theory” which essentially stated that how quickly the oil reserves are getting depleted and hence it will become pricier by the day. Anyone telling the author that in 2020 oil will trade in negative would probably give him a seizure. Though we don’t want to sound smart having the benefit of hindsight, the discussion just highlights the need to be amply humble about predictions especially when it is about the future!