Sentiment seemed upbeat as June dawned, underpinned by expectations for a summer defined by robust growth.
WTI rose above $68 (figure below) and Brent topped $70, as OPEC said the pandemic-era supply glut is drying up. Stockpiles are poised to recede quickly with barriers to travel falling and economic activity accelerating.
There are, of course, questions about the return of Iranian barrels. The nuclear deal is likely to be reinstated, although the proximity of presidential elections in Iran introduces some ambiguity. Negotiations in Vienna are in their eighth week. A spokesman for Iran, Ali Rabiei, said Tuesday there are “no obstacles” in the way of an “understanding,” merely some “differences” that need ironing out.
Abbas Araghchi, who leads Tehran’s delegation, said he’s “not sure” a conclusion will be reach during the current round of talks. The prospect of a delay added to the bullish impetus for crude. And to think, just ~14 months ago, WTI was (less than) worthless.
“The Iranian re-appearance will take place at a time when global oil demand is set to increase due to prevalent vaccination programs,” PVM’s Tamas Varga said Tuesday.
“Unless a deal is struck before June 18, reaching an agreement with a hard-liner in power will be an arduous task,” Varga added, noting that regardless, “the perceived recovery in global oil demand is set to provide a stable backdrop for a healthy oil balance — only the speed of the recovery is up for debate.”
Indeed. And on that front, it’s worth noting that Germany lowered its COVID risk level Tuesday to “high” from “very high.” Germany’s benchmark is infections per 100,000 people, over seven days. That figure was near 170 in April. It was just 35 on Tuesday. COVID ICU occupancy has halved since the beginning of the year. “If the trend continues, it could be a really good summer,” Health Minister Jens Spahn told the media.
The final read on IHS Markit’s manufacturing PMI for Germany in May was a touch higher than the preliminary print. Not surprisingly, the accompanying color was littered with commentary on disrupted supply chains. 90% of manufacturers reported increased input prices in May.
“Strong demand fundamentals mean that manufacturers are able to pass on some of the burden of higher costs through unprecedented price increases of their own,” Phil Smith, Associate Economics Director at IHS Markit, said. “Reassuringly, manufacturers continue to look past the current supply issues, with business expectations for activity over the year ahead sticking close to record highs and the pace of hiring continuing to accelerate as factories show an increased urgency to expand capacity,” Smith went on to say. “Although a symptom of the current supply issues, the successive record increases in backlogs of work bode well for output levels in the coming months as firms try to catch up.”
Inflation in Europe hit the ECB’s target in May, the flash estimate for last month showed. Eurostat said Tuesday CPI rose 2% YoY, up from 1.6% in April (figure below). Consensus expected a 1.9% rise. MoM, CPI rose 0.3% in May.
Core rose 0.9% YoY, in-line with estimates. You know the story: It’s unlikely to last.
Morgan Stanley described the current macro backdrop as a “conundrum” for market participants, who are staring at “early-cycle timing, mid-cycle conditions and late-cycle valuations.”
“It’s unusual to see this confluence, especially because it was only a little over a year ago that global risk markets were reeling and recording cyclical lows,” the bank said. “Thus, despite our economists’ call for strong global economic growth supported by the largest fiscal stimulus, the largest monetary easing and the highest consumer savings rates in post-war history, the investment recommendations from our strategists have a more subdued tone.”
“There continues to be a lot of optimism baked into the manufacturing PMIs as we saw today — solid numbers and upward revisions are being framed by acute inflationary pressures, supply chain constraints and robust forward looking indicators,” Bloomberg’s Michael Read remarked. “Aside from a variant-shock or geopolitical escalation of some sort it’s hard to find a trigger to dent expectations of strong growth over the summer.”
Something about the best laid plans.
Man plans and God laughs.