by Bill O’Grady and Kaisa Stucke
[Posted: 9:30 AM EDT] There were five major news items over the weekend:
Saudi Oil Minister al-Naimi sacked: Al-Naimi, who has been oil minister since 1995, was unceremoniously fired over the weekend, replaced with another Saudi Aramco official, Khalid al-Falih. Al-Naimi was considered a good administrator and was the de facto head of OPEC. At 80 years old, he has hinted at stepping down for some time but the fact that he was fired, and not allowed to resign, sends a signal that the new king and his effective regent, DCP Salman, are putting their own stamp on the country. At the Doha meeting, al-Naimi appeared prepared to agree to a production freeze, only to be overruled at the last minute by the DCP, who insisted that Iran also freeze output, which was sure to kill any deals. Although the official stance of the kingdom is that this move will not lead to new policies, we suspect that al-Naimi was willing to engage in jawboning to lift oil prices. Our position is that the Saudi policy of gaining market share was not necessarily targeted at the U.S. but at Russia and Iran, which pose geopolitical threats to the kingdom. By firing al-Naimi, the DCP is making it clear that the goal of Saudi oil policy is to undermine the Iranian and Russian economies. After all, a freeze would have likely led to higher oil prices even in the absence of real change because it held the promise of future cooperation. We strongly suspect that the new minister has heard loud and clear that the kingdom’s policy is to hurt Iran and, to a lesser extent, Russia. Thus, we view the change as potentially bearish for oil prices.
Fed officials talking about hikes: NY FRB President Dudley suggested after the employment report that the FOMC is on path for two hikes this year. St. Louis FRB President Bullard says he is “open” to a June hike and Boston FRB President Rosengren (an avowed dove) has been saying that the financial markets are underestimating the Fed’s likelihood of raising rates. Atlanta FRB President Lockhart says he is “on the fence” for June. Meanwhile, the fed funds futures put the odds of a June hike at 4.0% and don’t get to 50% odds until February 2017. As we have noted before, based on the Phillips Curve relationship, the FOMC is well behind the curve in any iteration. We have noted that there is a chance that Chair Yellen is using the dollar as her policy target. Waiting for dollar weakness before raising rates would make sense. However, given the comments coming out of the rest of the FOMC, there is little evidence anyone else is buying into this policy. We doubt the Fed moves in June; the WSJ’s Jon Hilsenrath also suggested this idea today. But the noise surrounding a hike may be there to build some degree of uncertainty into the financial markets.
Greece is becoming dicey: Despite demonstrations against the measures, PM Tsipras did get the Greek parliament to agree to reform pensions and raise taxes yesterday, but the IMF is making more comments indicating that the body may not agree to further bailout measures without debt relief. Debt relief is an anathema to Germany, which fears that others may ask for similar support. Meanwhile, surveys across Europe indicate that the Brexit vote may trigger similar referendums in other nations as well. Another Greek debt crisis could trigger even more problems in the EU and Eurozone and could put pressure on the EUR, which would not be welcome in the U.S.
Alberta fires: Forest fires in Alberta have reportedly cut tar sands oil production by 1.0 mbpd, although it does appear the fires will mostly miss the oil-producing regions. However, the workers tend to live in Fort McMurray, so it isn’t clear how the oil companies will function even after there is no fire danger. Oil markets were initially higher on the news but have given back some of their gains.
Chinese trade data: Exports in April fell 1.8% and imports fell more than forecast (down 10.9%). Key commodity imports declined; oil imports were down 7.2% (in volume terms), iron ore fell 4.7% and copper imports dropped 23.8%. Meanwhile, a major Chinese newspaper carried a full page ad warning about growing debt and non-performing loans.