FICC
| Commodities
Oil, metals, and the wider commodity complex, analyzed from the global macro picture down to physical supply and demand.
Saudi oil policy, like its defense policy, will be more aggressive and less predictable, following Deputy Crown Prince Mohammed bin Salman's apparent nullification of a production "freeze" deal at Doha.
A weaker USD resulting from more dovish forward guidance from the Fed, and evidence of continued production declines in non-OPEC and OPEC countries will continue to buoy oil prices.
These general themes - along with our assessment that markets were overestimating downside price risk and underestimating upside risks arising from supply destruction and geopolitical instability - supported the best-performing strategic recommendations we made last quarter.
While the post-GFC linkage between oil prices and medium-term inflation expectations evident in the 5-year/5-year (5y5y) CPI swaps market will continue to be debated for years to come, this is an empirical fact that will affect monetary policy and the evolution of FX and real interest rates over the medium term.
Lower oil prices are aggravating financial and social stress in poorer OPEC states, particularly in Venezuela, where the government recently executed a gold-for-cash swap ahead of looming debt payments.
The wide WTI - Brent differentials at the front of these respective curves will continue to incentivize crude-oil exports from the U.S. to European refiners, who tend to favor the light-sweet crude coming out of LTO plays.
A stunning 9.9 million-barrel build in U.S. oil inventories this week failed to arrest the upward climb in prices.
The remarkable admission by OPEC's secretary-general, Salem el-Badri, earlier this week that with "any increase in (oil's) price, shale will come immediately and cover any reduction" in output only hints at the larger impact of light-tight-oil (LTO) going forward.
While the oil market looked right through the Russian-Saudi production-freeze announcement earlier this week, we believe these states may be attempting to put lipstick on the proverbial pig, to provide a plausible narrative to explain the physical reality of lower oil production in a sub-$30/bbl world.
