New York – Washington Letter for Week beginning May 9
What happened last week?
One of the biggest developments last week was with Standard & Poor's (S&P) announcement of its rating decision on Turkey. The global rating agency confirmed Turkey’s foreign currency rating at 'BB+' and its local currency rating at 'BBB-', while the country’s outlook was revised up to stable from negative. The agency said the Turkish economy was resilient to the challenges posed by the busy electoral calendar in 2015, the end of the peace process with Kurdish militants, heightened regional instability, and weak investor sentiment toward emerging markets. In addition, S&P noted that it projects real GDP in Turkey to grow by 3.4 percent in 2016, compared to 4 percent in 2015.
On Friday, the U.S.’ non-farm payrolls for April rose only by 160,000, below the market expectation of a 200,000 increase. The unemployment rate remained unchanged at 5 percent in April, but was expected to decline to 4.9 percent. Due to weak macroeconomic data, the possibility of a rate hike by the U.S. Federal Reserve (Fed) has become a long shot in the bank’s June meeting. This week, the market is expected to price this in, and later wait for a rate hike in the second half of the year.
Another major development occurred over the weekend when Saudi Arabia's long-serving oil minister Ali al-Naimi was replaced in a major government reshuffle on Saturday. Al-Naimi, 81, served as the Kingdom's Minister of Petroleum and Mineral Resources since 1995. Recently, he was best known as an opponent to trimming the country's crude production against plummeting oil prices since mid-2014. In a royal decree, he was replaced by Khalid Al-Falih, the chairman of Saudi oil company Aramco -- the world's biggest petroleum firm.
What will happen this week?
This week the oil market will focus on two things -- the wildfires in Canada, and the new Saudi oil minister.
Although Al-Falih announced Sunday that Saudi Arabia will not change its oil policies, and continue supplying crude to the global market, oil prices were down on early trading Monday.
Al-Falih is regarded as an experienced individual, since he chaired the Saudi oil company Aramco, and is expected to be in line with Deputy Crown Prince Mohammed Bin Salman’s Vision 2030, which aims to publicly offer less than 5 percent of shares in Aramco to create revenue for a $2 trillion sovereign wealth fund, and to attract foreign investment into the country.
However, oil prices were in decline on Monday, as the market perceived the change in Saudi ranks as a risk against the stability in the global crude market.
Nevertheless, once investors overcome this, prices are expected to increase, especially with the supply risk from Canada where wildfires in the country’s oil-rich Alberta province led to the country losing on average one million barrels per day of its production capacity.
Due to the risk of secure supplies from Canada, the spread between the American benchmark West Texas Intermediate (WTI) and Brent crude price has fallen below $1 a barrel. The last time this happened was in December 2015 when the U.S. lifted its 40-year-old self-imposed crude oil export ban, which created a psychological effect on U.S. crude prices. However, this time, there is actual physical cut in crude supply in the western hemisphere, and if it continues, WTI could exceed the Brent price this week.
Most of Canada’s crude exports go to refineries in the U.S.' Gulf Coast, which still import heavy crude, like Canadian tar sands. With the decline in Canada’s production and exports, U.S. refineries could opt to import heavy crude from overseas.
The U.S. Energy Information Administration’s data this Wednesday may show a sudden spike in U.S.’ weekly imports. The market expects U.S. weekly crude inventories to rise by only half a million barrels, since refiners had to draw crude from stocks to mitigate the negative impact of Canadian crude supplies.
In addition, the value of the U.S. dollar against other major currencies, such as the British pound, euro, Chinese yuan, and Japanese yen, will be watched closely this week. The greenback recorded gains against these currencies on Monday, which could bring oil prices down if it continues to increase.
On Friday, producers’ price index and retail sales for April in the U.S. will be announced. Even if this data turns out strong, the Fed is not expected to raise interest rates in June.
When the bank made a rate hike in December 2015 – the first in almost a decade – it was expected to follow with four more in 2016. This forecast was cut to two rate hikes a couple of months ago when Fed officials made dovish statements. Now, the market mostly expects one rate hike, if any, from the Fed for this year.