Oil Prices, the Fed,
and the Netherlands
Hello One and All…
A handful of things are happening today and in the next 24 hours, which I thought deserved comment.
No doubt you have all noticed the declining price of oil over the past three weeks (–13%), most of which came in the last week. Oil prices have now declined for six consecutive trading sessions and prices now sit at the lowest point since OPEC voted on its production cuts back in late November. Price declines are attributable to an meaningful increase in US rig counts, which have increased in each of the past eight weeks. The increase in US rig counts has caused US production forecasts for 2017 and 2018 to be revised significantly higher. US crude production is now expected to reach 9.54 M bpd by December ’17 up from 8.29M in March of ’16, an increase that more than offsets the 1.2m bpd cut agreed to my OPEC last November. OPEC agreed to a production cut of 1.2 m bpd, which is about a 3% cut in production, which they assumed would be offset by an increase in the price of oil, which they got when oil prices went from $43.57 in early November to $54 at the end of December. This 24% increase in price was a great trade for 3% less production. However, higher prices prompted US shale players to turn production back on, which has grown US crude inventories and depressed crude prices. All of a sudden OPEC is looking at a cut in revenues and members will have to decide if they will adhere to agreed production cuts in the face of lower prices. It’s a slippery slope. An increase in OPEC production will drop prices further. If so, US shale producers may decrease production and prices may adjust upward. This dynamic is likely to leave crude in a trading range of low $40s to low $50s in the months to come.
The “headline” employment data last week has futures traders discounting a 93% chance of a 25 bps increase by the Fed in their March meeting. If the Fed moves at this meeting the fed funds rate would stand in the range of 0.75% – 1%. If this happens, it will likely push the dollar higher, which of course will cause some concerns for companies selling goods overseas. It is important to note that this will be the third increase from the Fed, which historically has been problematic for the markets. However, we are in uncharted waters relative to the absolute level of interest rates, so it is hard to say how the markets will act.
We know that the Fed is highly focused on employment and inflation in determining their rate hikes. Inflation is close enough to 2% for Fed purposes and the employment numbers on their face seem good, so this is why the Fed is likely to move. However, we do well to understand that the quality of the job market is not good. Without going through the entire analysis, chew on the following: Breadwinner jobs are defined by the BLS as jobs in Construction, Manufacturing, White Color, FIRE (Finance, Insurance & Real Estate), the professions, and core government. These jobs pay upwards of $60,000 in annual cash compensation. As of February the US had 72.095 million “breadwinner” jobs, roughly half of all the jobs in the US. It is interesting to note that there were 71.92 breadwinner jobs in December of 2007 and 71.94 million jobs in January of 2000. A comparison of the jobs during these time periods show a decline in most of the breadwinner jobs. Importantly, in the goods-producing jobs sectors (energy, mining, manufacturing, and construction) there were 19.94 million jobs in Feb ’17, which were down 10% and 19% from December ’07 and January ’07, respectively. The only growth during the time period in question was in the relatively small sectors of computer systems and design and “management of companies and enterprises,” which grew by 30% over the past nine years, but these jobs only represent 2% of the job market.
Compare this to the increase in part-time jobs that generate an average of on 26 hours per week and pay $20,000 annually. In January of 2000 there were a total of 34.69 million part-time jobs, there were 37.19 million part-time jobs in 2007, and in 2017 there are 40.38 million part-time jobs. This dynamic has been driven by a decline in real net business investment since January of 2000. The only meaningful growth in the jobs market over since the turn of the century is in the HES (Health, Education, & Social Services) complex, which has grown from 24.38 million jobs in 2000 to 33.32 million jobs in 2017, a 37% increase. This increase is in part due to an aging population in need of more healthcare. However, this need will only increase in the years to come and federal, state and local governments are so financially strapped that they can’t be counted on to continue the outlays necessary to fill jobs.
The Netherlands hold parliamentary elections beginning today and ending mid-day on March 15, which represents the first test this year of anti-immigrant nationalism in Western Europe. The Brexit vote and the Trump election make the nationalism sentiment hard to ignore and in the Netherlands the current Dutch Prime Minister (Mark Rutte) is neck and neck with Geert Wilders and the far-right Party for Freedom (PVV). The PVV is running on the proposed policies of banning the practice of Islam, curbing immigration, and pulling out of the EU. Remember that there are 28 parties with over 1,000 candidates vying for 150 parliament seats. Moreover, if PVV were to win the most votes, most of the other parties have said they will refuse to form an coalition with PVV because of their radical stance. We will have early indications tomorrow, but won’t know for certain the outcome until March 21. Brexit and Trump were big surprises, so handicapping this outcome is not easy.
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