The GERM Report

-Europe wobbles, while US payrolls miss

-We’ve got ourselves a bit of a supply problem.  

There were fewer ups and downs at the local trampoline park than seen in the price of oil early Thursday. For much of the week, Brent has oscillated between $41 and $42 per barrel, with US crude oil moving through a similar tunnel. Traders were waiting for the data shoe to drop on the US economy by way of jobless claims, though new filings show hiring is also trending in tunnel fashion. On the other side of the Atlantic, the British economy is facing pressure that may be compounded by the messy divorce from the European Union. In the continental economy, data points show some resilience, though there are fears of a new wave of economic and health trouble. For OPEC, patience may be wearing thin. Legacy cheater Iraq looks like it’s up to its old tricks, while Saudi Arabia is struggling to hold to its long-term economic vision.

If you blinked while reading the crude oil tape this morning, you missed out on a lot of minor ups and downs. A big spike last week was met by selloffs early this week and the market can’t decide which way to run. US data on unemployment didn’t even move the needle this morning. The price of Brent was down 0.07% as of 8 a.m. to yawn in at $41.74 per barrel.

US President Donald Trump has largely pointed to short-term data and the stock market as indicators of economic health. The much-watched GDPNow reading from the Federal Reserve Bank of Atlanta estimates GDP growth for the third quarter at 32%, a slight revision upward from its previous assessment. It’s easy, however, to post double-digit growth given the massive hit on the economy from the pandemic. Hiring data show initial filings for unemployment insurance edged up some 4,000 from the previous week to 870,000, missing expectations. While the four-week moving average was revised lower, the US Labor Department revised the previous week’s estimate higher by 1,500 to 913,500. Stepping back a bit finds recovery is anything but certain. US data show the median tenure on the job was about 4.1 years, little changed from the 4.2 years posted in January 2018. That suggests the jobs out there aren’t satisfying, wages aren’t very good or trajectory is poor. Either way, if workers are jumping ship early, it suggests something of a jenga-effect in the economy, as laborers move on quickly from emerging companies. Responding to questions from the Federal Reserve Bank of Dallas, meanwhile, a majority of those surveyed said US oil production has peaked and crude oil prices need to get into the $50s before health returns to the energy sector. US GDP in the second quarter dipped in dramatic fashion, and don’t forget all the chatter about inverted yield curves in fourth quarter 2019. In statements this week, the heads of the various Federal Reserve districts said they’ve used what they have in their arsenal already, leaving support to a political body riddled with partisan cancer. Foreign investors could grow wary of the toxic climate in the United States, particularly as Trump refuses to honor a long-standing tradition of a peaceful handover of power.

On the other side of the Atlantic, it looks like the messy Brexit is having profound impacts on the British economy, and that may only get worse as the government tightens pandemic-control restrictions. That would have a particularly damning impact on the services sector. The government recently tried to steep more cash into the economic tea, though forecasters expect October GPD levels to remain negative. The continental economy has performed marginally better, though there too we have concerns about a reversal. Activity in the services sector is just below the line separating growth from contraction.

“While the reversal of reopening measures has been very limited so far, it is concerning to hear that businesses are already noticing a decline in activity thanks to the resurgence of the virus,” economists at ING wrote.

In further worries about the economic jenga tower, the Red Cross and Red Crescent Societies found at least 51.6 million people globally have been impacted by the triple whammy of floods, storms and COVID-19. In the Americas, that has shown up in a steady series of storms in the Gulf of Mexico that at one point sidelined as much as 80% of US offshore production and crippled some of the refineries in the key PADD 3 region. Among the hardest hit, however, are the emerging economies in the Asia-Pacific. If those economies tumble, it could have a domino effect on the global situation.

So it’s against this backdrop that we need to heed the warning on supply-side strains. OPEC has a clear supply problem, and that was put on display with the arrival of crude oil tankers at Libyan ports. Commodities trader Mercuria Energy Group told us Wednesday that the extra oil on the market, which includes not only Libyan barrels but the extra 2 million allowed under the collective curtailment agreement, is not welcome. The good folks at Argus find that Saudi Arabia, the de facto head of OPEC, has its back against the wall. The kingdom based its budget on oil at $65 per barrel and the IMF suggests it needs something closer to the $80 mark. Vision 2030, a sweeping overhaul of the Saudi economy, is likely out of reach. That creates a dilemma; stick to the plan, or try to grab market share to pad government coffers. Iraq, one of the least compliant among OPEC producers, tried to walk back comments that it was indeed looking to export more. The solution to low oil prices is low oil prices, but given the stubbornness of economic recovery, that solution may be a long way off.