The GERM Report

-US jobless claims a bit worse than expected.

-China posts growth in the second quarter.

The market is having a latent response to the decision from OPEC to ease back on production curtailments, with Brent erasing gains from a previous session spurred by supply-side data. OPEC’s secretary general on Wednesday credited coordinated restraint along multilateral lines with providing a semblance of stability in the market and it is time to step back. New OPEC+ barrels will return to the market soon, providing headwinds for commodities. The drop, however, was shielded by positive growth data from China. Threats to European supply, meanwhile, could emerge should Caspian neighbors Armenia and Azerbaijan pick up arms. Elsewhere, the IMF warned that more cash injections were needed as the world braces for the next phase of the pandemic.

Brent crude oil was down some 0.6% as of 8 a.m. ET to trade at $43.50 per barrel. Crude oil prices rallied in the previous session on the drain in US crude oil inventories, though the realization that more oil was coming to the market finally set in on Thursday. That’s good news if you look at Chinese economic data, but bad news if you heed the warnings from the International Monetary Fund.

The two dozen or so countries party to OPEC curtailments agreed Wednesday to ease back on restraint, from the sidelining of some 9.7 million barrels per day since May to around 7.7 million bpd by December. Speaking Wednesday, OPEC Secretary General Mohammad Barkindo said coordination since May “helped reintroduce a semblance of stability to the market.”

Oil demand has bounced back from the April lows, but is still expected drop by around 8.9 million bpd for the year. Demand indicators, however, were strong, with the US economy recording a 7.5 million drop in commercial crude oil inventories for the week ending July 10.

Further signs of recovery came from China, which reported a 3.2% increase in gross domestic product for the second quarter. Industrial output increased, though the service sector showed a contraction. OPEC economists in their monthly report for July estimated demand outside the OECD could increase by 3.5 million bpd, with the Asian and Chinese economies accounting for more than 2.4 million bpd of that. China saw imports surge in May as the government cashed in on cheap oil, with the intake of refined products such as naphtha showing similar gains. China’s National Bureau of Statistics, however, reported that retail sales were down 3.9% from the same period last year, though employment prospects were on the rise.

US data on Thursday showed first-time jobless claims at 1.3 million, more or less steady, but somewhat worse than the expected 1.24 million in new claims for the week ending July 10. The headline number suggests the US economy is still shedding jobs, but at a slower rate than during the second quarter. Some segments of the US economy have yet to gain traction and the estimated 33 million people still without a job may see their incomes shrink substantially as the $600 per week in additional federal support is set to expire by the end of July. A report from JPMorgan Chase Institute found the federal supplement boosted spending in furloughed households by 10%. During a typical economic downturn, households receiving financial support during periods of unemployment dropped by 7%.

“Our estimates suggest that expiration will result in large spending cuts, with potentially negative effects on both households and macroeconomic activity,” the report read.

From the perspective of the IMF, the “exceptional” support from policymakers in the world’s largest economist, some $11 trillion, “put a floor under the global economy.” But with the pandemic showing resiliency, the risks range from trade interruptions from protectionism to increased volatility in commodity prices.

“Though fortunately some jobs have since been regained, the employed share of the working-age population stands much lower than in early 2020,” IMF Managing Director Kristalina Georgieva wrote. “Moreover, the full extent of the impact on the labor market is likely much higher as many employed people are facing reduced hours.”

If the IMF is right, then economic pitfalls should keep the European economy satiated against geopolitical threats. More than a dozen Azeri and Armenian servicemembers were killed in action along the shared border. The Caspian corridor is rich in energy, both in terms of reserve and infrastructure. Past regional conflicts have interrupted flows through the Baku-Tbilisi-Ceyhan pipeline that connects the Mediterranean market to the giant Azeri-Chirag-Gunashli oil field in the Caspian Sea.