Tuesday, 28 November 2023 — Melbourne, Australia

By Charlie Ormond Editor, Fat Tail Daily

[4 min read]

Dear Reader,

Brian Chu is on holiday this week, so I’m taking a look at the commodity markets for him.

In contrast to earlier this year, markets have reacted blithely to weak economic data from the US.

The ‘bad news is good news’ reaction from markets is on a bet of a dovish Fed that will likely keep rates on pause from here.

With interest rate hikes out the window in the eyes of many, the US dollar has weakened from selling pressure, helping commodity trading.

For all you gold bugs, I’m sure you’ll be happy to see gold surpassing US$2,000 again.

Silver and iron have also been on a tear, gaining 3–4% last week with the easing US Dollar Index. Uranium prices have also surged, topping US$80 per pound for the first time in 15 years.

But one key commodity has been trending in the other direction. Oil is down 10% in the past month, falling below the 200-day moving average.

WTI Crude is trading at US$75.04 per barrel, while Brent Crude sits at US$80.33 per barrel.

It’s a different tune to a month ago when concerns of inflationary pressure from rising oil prices were in vogue. Let’s explore what’s changed in the market.

Geopolitical tensions shift

As the conflict in the Middle East began in October, oil prices feverishly rose to nearly $100 per barrel.

Concerns of a broader conflagration in the Middle East had all eyes on Israel, Iran and the Strait of Hormuz.

Approximately 21% of global oil goes through the strait. It serves as a vital artery for the Gulf states to supply the international markets, particularly Asian markets.

The conflict between Israel and Iran's proxies continues, with Gaza risking a confrontation between the two states. If Iran fell into a dispute with its neighbours, the strait would be the first move on the chess board.

Thankfully, tensions appear to be easing, with Iran’s rhetoric ebbing and Israel and Hamas extending their cease-fire.

While the issue still simmers, the risk premium has faded from oil prices, which are down almost a fifth from their late September highs.

Now traders are looking to another geopolitical tension brewing.

OPEC output takes centre stage

The OPEC+ group surprised the market late last week when it announced that it would be delaying its next meeting to 30 November.

The delay came after early talks struggled to reach a consensus on output levels.

Saudi Arabia, Russia, and OPEC+ members have already pledged oil output cuts of about 5 million barrels per day (bpd), or about 5% of daily global demand.

These cuts began in late 2022 and then extended multiple times. They have also included voluntary reductions by Saudi Arabia of 1 million bpd and 300,000 bpd by Russia.

These were set to finish at the end of 2023, but with oil prices sharply declining, Saudi Arabia wants to deepen the cuts into 2024.

Saudi Arabia is anxious to restart growth in its economy as it struggles with looming demographic pressures.

43% of Saudis are under 15, and the Saudi government believes a high oil price is needed to create jobs for its growing population.

The Saudis have been pushing a further 1 million bpd cut and extension beyond 2023— but have hit a snag.

‘This postponement indicates difficulties within the OPEC+ group to reach and agreement to cut production,’ said Jorge León at Rystad.

‘Every member country acknowledges the need to reduce output to support prices into 2024. The question is how to share the burden of this.’

So, who are the members pushing back on these cuts, and will it make a difference?

Test of Saudi power

Saudi Arabia will find its de-facto leadership of OPEC tested when the group meets later this week in Vienna.

The cartel was already grumbling after members ignored Iran's calls for Muslim countries to embargo Israel after the hospital bombing in Gaza.

But OPEC's Thursday meeting's primary source of disquiet has been from its African members.

Angola, Nigeria and Congo have baulked at the idea of further cuts. The countries have pushed back on early informal talks by OPEC members, saying the extensions would sap crucial investment in their oil infrastructure.

So far, none of the Sub-Saharan nations have come near their quotas and will likely see production cuts in the future— but for all the wrong reasons.

These nations have struggled with production problems due to underinvestment in their ageing fields.

The worst has been Nigeria, which has faced years of production woes that have cost the country over US$7.8 billion in the past five years.

For these nations, the forced quotas will be the central sticking point for Thursday's meeting.

According to one unnamed African delegate, a minor reduction would be tolerable, while a significant cut was ‘not even an option’, adding:

‘We are looking at a quota that would help us attract investors. If investors hear that our quota has been slashed, that is not a good signal.’

‘There are big troubles if the value is too low,’ said another delegate. ‘It has a direct impact on the revenue of our countries. It is a delicate matter.’

Another significant issue facing these producers is that Russian crude oil has undercut their Asian market share. Since the invasion of Ukraine, Ural crude oil has seen its price plummet.

China and India have been happy to ignore Western sanctions on Russian oil and buy it at a discount of as much as US$40 per barrel.

Russia is the most prominent member OPEC+ and has strengthened its ties with Saudi Ruler Mohammad bin Salman. Acting as a second enforcer in the negotiations for further cuts.

The cuts will benefit their country’s revenue but can also serve as a wider move against the Biden administration and Western powers. Raising our fuel costs and adding to inflationary pressures as payback for our criticism of their poor human rights.

Short-term oil outlook

The OPEC+ meeting delay ‘heightens the drama, probably not the outcome,’ Citigroup's Eric Lee said in a note.

Saudi Arabia will likely roll its one million-barrel-a-day voluntary cut into 2024, while other members will likely broadly commit to existing quotas through next year.

But even if OPEC falls behind Saudi Arabia, it may not be enough to bring oil out of its shorter-term declines.

As the world's largest oil importer, markets look towards China as the driver for demand, but its economic output remains subdued.

Fresh stimulus to China’s indebted property sector could be positive for oil markets, but it’s slow going so far.

The latest industrial output beat expectations, but only because analysts pitched them so low.

Meanwhile, pressure is being placed on oil producers as the United Arab Emirates (UAE) hosts the next climate change conference this week.

The controversy surrounding the appointment of an oil and gas executive to head the conference could mean public pressure on oil producers to transition.

Reporting has already revealed that the UAE is using the meeting to discuss oil deals with 15 nations.

Now, they have stressed that the industry must not be seen as hindering progress and accept the inevitable ‘phase-down’. What that means for supply is still up in the air.

The International Energy Agency forecasted that oil would tip back into surplus next year, giving credence to cuts. But for now, oil markets are anxiously watching OPEC.

Wherever the deals end up, we’ll likely see further volatility in the oil markets in the months ahead.

Regards,

Charlie Ormond,
Editor, Fat Tail Daily

By Bill Bonner Editor, Fat Tail Daily

[3 min read]

Dear Reader,

…from the very opening-out of the world and life for the average man, his soul has been shut up within him. It is in this obliteration of the average soul that the rebellion of the masses consists…

~ Jose Ortega y Gasset

‘Hooligans,’ was the judgement of our neighbours. ‘Resentment,’ was the guess of a friend at church. ‘Thuggery,’ was the justice minister’s opinion.

Dublin was the scene of inhabitual pandemonium last Thursday. Normally, it is a safe city. A calm city. People are polite. It is not like Baltimore or Paris — where social disturbances are more common.

‘We’re like the rest of Europe now,’ said a friend cheerfully.

We happened to be in town when all Hell broke loose. Souls, shut up for too long, suddenly broke down the door and ran wild in central Dublin. Every policeman in the area was summoned to the downtown. Police helicopters were in the air. Sirens sounded all over town. ‘What was the hubbub all about?’ 

Running Wild

We turned on the television to discover the city centre in flames. Children had been stabbed. Rioters looted dozens of stores and set fire to at least one city bus.

What was the cause of the riot? This is where it gets interesting: nobody wanted to say.

The police chief announced that there were ‘rumors’ running wild on the internet…and that we should pay them no mind. He went on to say that the ‘person of interest’ (in the stabbing incident) was in custody…and that they were looking for no one else.   

A viewer might have been puzzled. It took a local to explain it…almost in whispers.

‘Oh…there was a long fuse on that one. Dublin has gotten so expensive. It’s hard to find an affordable place to live. And it doesn’t help that there are so many immigrants and refugees coming in. The attacker…according to the internet…but you can’t believe anything on the internet…they say he was an illegal immigrant.  People had had enough. We had an incident not long ago when a young woman was killed by an immigrant from Africa. The man got the maximum sentence. But in Ireland, the maximum is only 20 years. People didn’t think that was satisfactory. Nobody wants to say so, but this is about immigrants.’

But if one immigrant was the villain, another was the hero. Caio Benicio, a Brazilian Deliveroo driver, apparently stopped the assault by taking off his helmet and using it to bash the assailant in the head.

What Goes Around

Ireland was once a leading source of immigrants — into England, North America, Australia and much of the rest of the world. They were widely resented as ‘lawless,’ ‘hard-drinking’ and ‘uncivilised.’ ‘No Irish Need Apply,’ was a regular feature in the want ads.  

But they assimilated well. At least 20 US presidents have had Irish roots. And now, what went around comes around…the Irish no longer suffer as immigrants in foreign countries…now, they suffer immigrants in their own.

And all immigrants are not created equal. The Normans conquered England. Within a few generations they were indistinguishable from the native Anglo-Saxons. But the Moors invaded Spain in the 7th century. They never merged into the local population and were expelled 700 years later. And American Blacks, too, even after hundreds of years, still keep their distance and hold their own culture somewhat apart.

 But anger against immigrants is rising. The Arkansas Democrat-Gazette reports:

Far-right party stuns with win in Netherlands

[People in one] of Europe's most socially liberal countries, woke up to a drastically changed political landscape Thursday after a far-right party swept national elections in a result that has reverberated throughout Europe.

Geert Wilders' Party for Freedom, which advocates banning the Quran, closing Islamic schools and entirely halting the acceptance of asylum-seekers, won 37 seats in the 150-seat House of Representatives, making it by far the biggest party, in a clear rebuke of the country's political establishment.

‘All of Europe wants a political turnaround,’ said Alice Weidel, the leader of German far-right party AfD, or Alternative for Germany, as she congratulated Wilders on his win.

Urban Mobs

Immigrants are an easy target. They take up space. They compete for housing…jobs…in many countries, they are a burden on the taxpayer. Latinos in the US…North Africans in France…Palestinians, Ukrainians, Syrians, Yeminis — the greater the numbers…and the larger the ‘cultural gap’ with the natives…the greater the trouble.

The resentment builds. Eventually, it finds an outlet. Sometimes it is the natives who protest. Sometimes the immigrants themselves. And not everyone expresses his discontent by writing a letter to the editor. Some prefer to firebomb police cars.

But is that all there is to it? Urban mobs letting off steam? Probably not.

Stay tuned…more on the Revolt of the Masses…tomorrow.

Regards,

Bill Bonner,
For Fat Tail Daily