It’s Too Darn Hot

Risk level: Yellow

RED: Severe (+/- 4%) ORANGE: High (+/- 3%) YELLOW: Elevated (+/- 2%) BLUE: Guarded (+/- 1%)


-Should Brent at $50 be considered the new normal?

-Start-ups are seeing brain drain in the U.S. market

Global sentiment about the prospects for a vaccine for COVID-19 left fundamentals in the waste bin last week, with Brent crude oil topping the $50 per barrel mark for the first time since March. Convoys carrying the Pfizer/BioNTech vaccine left warehouses in the United States during the weekend, giving hope for an eventual return to normalcy. The prospects of a hard Brexit, the German decision to lockdown through the Christmas holiday and the lack of fiscal stimulus in the United States should be cause for concern, however. While investors are moving into riskier assets such as oil, we wonder if the recent rally was too much too soon.

Not even a 15.2 million barrel build in U.S. commercial crude oil inventories could spoil the run toward $50 per barrel last week. We noted recently that even analysts at S&P Global Platts felt fundamentals supported $40, not $50, Brent. It was, however, something of a smooth week even with intra-day volatility. Brent finished the week up 1.46%, less jumpy than we expected, to close trading Friday at $49.98 per barrel.

Platts analysts we spoke with during the weekend suggested $50 per barrel might not be the new normal, noting that once the relief from vaccine hopes subsides, the market might finally realize that 2020 was arguably one of the worst on record in terms of economic performance. Yes, companies are hiring and yes the stock market is doing considerably well, but most major economic indices are far below where they were this time last year and most of the smart people in the room don’t expect full recovery, whatever that means, for another six months at best.

State Street Global Markets looked at November with fondness, pointing to a record-breaking run for the Dow. But risk appetite was waning, particularly on the European continent. Last week, German Chancellor Angela Merkel locked the country down until mid-January and the prospects of a messy Brexit are a potential drag on growth. Brexit negotiators hinted at progress during the weekend, but we see the potential for a grand bargain before the New Year about as likely as a new stimulus package in the lame-duck U.S. political period.

Monday should be a day for relief in other places as the voters in the U.S. Electoral College cast ballots for president. Those votes should make former Vice President Biden’s win unquestionable, though the Trump administration has another chance to undermine the democratic process in early January, when lawmakers meet to confirm the results. We looked at whether the pandemic and the rest of the issues in the United States were hurting confidence in the economy. Perhaps not in terms of trade deals, with a Biden administration expected to take a softer approach to China, but in the trenches.

Examining the behavior of U.S. job searchers during the pandemic, analysts at the National Bureau of Economic Research found those looking for work are looking at their version of safe havens.

“Relative to larger firms, early-stage ventures experienced a decline in the number of applications per job posting, a decline driven by higher quality and more experienced job seekers,” their report read. “This led to a deterioration in the quality of the human capital pool available to early-stage ventures during the downturn.”

That’s a sentiment that might not show up in the financial press. With universities and colleges struggling to adapt during the pandemic, that human capital will be tough to replace. Human ingenuity, particularly when its targeted at novel and nascent projects, is a driving force for development. Without that development, nations can fall behind. Charles F. Doran, now at the Johns Hopkins School of Advanced International Development, saw national development as parallel to national power. That development also corelates to state behavior. An ascendant nation feels emboldened, while declining powers at first become desperate, but grow complacent and eventually acquiesce to a new status quo. We could look to the decline in human capital through the lens of declining powers.

A Biden administration could arrest that decline, but given the lingering support for Trump’s attack on American democracy from the public and national leaders alike, it’s unlikely that he will carry the country back to the Zenith of power that was apparent after the collapse of the Soviet Union. The mighty shale, meanwhile, is no longer the bonanza it once was, though it does contribute more to the global market mood than ever before. Europe, meanwhile, is turning toward a greener agenda, but just like in OPEC+, that could be an exercise in herding cats. Doran in his studies looked at the inflection points of state power, arguing that it’s at the peaks and troughs where volatility and uncertainty are at their most extreme. These are uncertain and volatile times and that will likely be manifested in the price of oil for the foreseeable future.

The EIA last week reported a 15.2 million barrel build in crude oil inventories last week, and levels in Fujairah were about 12% higher than they were for the week ending Dec. 11. We’re curious to see if that’s enough to bruise demand prospects in the upcoming OPEC and IEA monthly market reports. We would expect an early-week bounce in commodities and equities alike given the vaccine rollout in the United States. How the Trump administration will react to voting in the Electoral College could be interesting theater. And we worry the president will balk on any stimulus package given his sore loser mentality. We would expect something of a balanced week though, with early optimism dampened by the potential for another surge in inventories. We’re issuing a Yellow alert for the week, anticipating movement of at lease +/-2% for the price of oil.


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