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March 7, 2024 | OPEC Contemplating Extending Its Quota Cuts To Year End Bouys Crude Prices

Josef Schachter

As a 40 year veteran of the Canadian Investment Management Industry, Josef Schachter has experienced several exceptional and turbulent global economic and stock market cycles. With his primary focus on the Energy Sector, Josef is able to weave global political, economic and monetary issues with current energy data into a compelling story of what's going on in the sector, what is to come, and why.


The Bank of Canada announced that they would keep their overnight rate at 5% as underlying inflation still persists. They also plan on keeping their quantitative tightening (QT) measures. The C$ improved 31 ticks to 73.88 on this announcement.

Chairman Powell is before Congress today and tomorrow and markets are watching for any indication of when the pivot to lower rates will occur. So far in his testimony he remains concerned about inflation persisting and that the timing in 2H/24 of any lowering of interest rates was data dependent. The Q&A over the next two days will see how he handles the political attacks and pressure to start the pivot early to keep the economy strong into the fall election cycle. So far he has kept above the political fray. He recently commented in Congress that a soft landing was his goal for the economy this year.

The US economy is growing and Biden wants to run for the Presidency again with his success with ‘Bidenomics”. However, when you consider that the US federal debt level has gone up US$834B during the last fiscal quarter to create US$335B of GDP growth, Bidenomics needs US$2.50 of additional debt to create US$1.00 of GDP. Effectively a net growth of -US$1.50. NUTS! At some point bond vigilantes will want higher yields to justify the fiscal profligacy. The bottom line is that the US is not growing by economic fundamentals but by deficit spending. The US debt is now US$34T and is growing each 100 days by US$1T. By year end the debt could rise to US$37T. The interest cost alone on this debt will rise over US$1T this year eating into a large portion of the US government revenues. This debt squeeze could halt the Fed from any rate decreases in 2024 which the market is not discounting.

Mixed economic data in the US continues with some data showing a slowing economy but others indicating inflation reversings to the upside. This stagflation pivot is not what the bond and stock market want to see. So let’s go through the recent economic & political releases of significance.

  • The US Core Services PCE index spiked to 7.15% in January. This was the worst month-to- month jump in 22 years, according to the Bureau of Economic Analysis. Core PCE (MoM) rose 0.4% up from 0.1% in the prior month.
  • US regional and local banks are under duress again due to problematic commercial real estate. New York Community Bancorp (NYCB) is the problem child now. The stock has cratered and its bonds have plunged. It had a recent US$2.4B goodwill impairment for commercial office buildings and rent controlled apartments. The bank controls US$114B of assets and is the 30th largest bank in the US. If it fails then we could see another run on banks like we saw last year this month. The firing of its CEO, Chief Audit Officer and Chief Risk Officer are red flags. Today the stock is down 45% to US$1.76 per share. The bank has hired investment bankers to shore up its balance sheet. An FDIC takeover is more and more likely. Hopefully it doesn’t lead to large deposit runs at regional and local banks that creates another banking crisis.
  • Investors are worried about their bank deposits and have moved to Money Market Funds which have increased their assets to US$6T. This level had only been reached before during the Dot-Com bubble, the Financial Crisis and during the Pandemic. Parking money in safe areas has been an early signal of duress and worry.
  • The Conference Board Consumer Confidence showed a plunge to -3.9, a fourth month of decline.
  • The recent fires in Texas have raised concerns about the US food supply going forward. Over a million cattle perished, 1M acres were burned destroying crops and gutting infrastructure. Drought and high costs to produce now have the US headcount (USDA) at 87M, the lowest level since 1951. Statistics Canada shows our headcount at 11M (cattle and calves), the lowest level in more than 30 years. Beef costs will be much higher this summer. Stock up now if you can!
  • US car inventories have soared and a collapse in some vehicle prices is now occurring. Clearly EV prices have collapsed and vehicles are being sold at large losses for the manufacturers as they work to get the cars moving off the dealer lots. Inventories at dealer lots are now full and customers are down due to the high prices for popular vehicles (mostly conventional trucks) and the high cost of financing. More buyers are now missing payments which is adding to inventories of repossessed vehicles.
  • Apple is facing a slump in business in China as the Chinese government pushes Huawei products and requires government employees not to use Apple products and support the local producer which is making cell phones similar to the iPhone product at a  lower price.

On the wars front:

  • President Biden is working to get a hostage deal before the start of Ramadan on March 10th. He is waving a carrot of recognizing Palestine (PLA controlled under new leadership). Israel wants an accurate count of the hostages (alive and dead) and wants a release of the elderly, the ill and all females. Hamas wants a longer ceasefire and a large number of militant prisoners in Israeli prisons released. It also wants large aid convoys to come into the country that would be distributed by them. This latter issue is a non-starter for Israel. Biden needs some progress for his election chances. He needs to get a ceasefire to appease his leftist members.
  • The US and Jordan have made numerous air drops of Halal foods (35,000 meals per day) for Gaza residents. It has been a bit of a debacle as many of the deliveries have ended up in the Mediterranean Sea and have not been recovered. Hamas of course wants to control these supplies. Biden has admitted it has been a botched mission.
  • The Hezbollah leader Nasrallah is getting closer to releasing his troops to attack and then invade Israel if Israel invades the southern Gaza city of Rafah. Part of his stance change could be because his grandson was killed in an IDF attack in southern Lebanon. If this front opened in all out war it would be a horrific expansion and the death toll would be very high. The question would be are there going to be Iran’s Quds fighters in the country helping in the command and control of this expansion of the war. Iran has supposedly given its blessing for the war to expand from Lebanon if Rafah is invaded by the IDF.
  • President Zelensky is traveling around the world to get munitions and funds to keep his country in the war with Russia. He went to several European countries and even to Saudi Arabia with an open palm. The Saudis could help with a prisoner swap as they are close to Russia and could help financially. The recent success by Russia in eastern Ukraine taking new territory has been offset by Ukrainian special forces hitting and sinking Russian warships with navel drones. It is a stalemate for now but Ukraine needs more munitions ASAP if the Russians start a new offensive. Europe has made a lot of verbal commitments but actual munitions arriving in Ukraine is another matter.
  • Russia is getting ‘protection’ requests from breakaway area Transnistria (from Moldova) to take it over and add it to their country. As it is west of Ukraine it could become another front in the war if Russia brings in troops and weaponry.

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March 7th, 2024

Posted In: Schachter's Eye On Energy

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