- Crude oil prices finally hit bottom as OPEC+ considers production cut
- Strong ADP report bodes well for Friday’s payroll report
- U.S. productivity expected to improve
Crude oil prices finally hit bottom as OPEC+ considers production cut — March WTI crude oil prices on Wednesday closed sharply higher by +3.14%, thus breaking a string of losses in 10 of the previous 11 sessions. March crude oil rebounded higher from Tuesday’s 1-year nearest-futures low of $49.31 per barrel, where the contract was down by a total of -$16.34 per barrel (-25%) from the 9-month high of $65.65 posted in early January.
The fall in WTI oil prices on Tuesday temporarily below $50 per barrel undoubtedly grabbed the attention of OPEC+ officials meeting in Vienna, although April Brent crude bottomed out at $53.69 on Tuesday before rebounding higher to a close of $55.28 on Wednesday.
Crude oil prices have plunged since early January when the Chinese coronavirus started spreading. Bloomberg has reported that China’s crude oil demand has already plunged by as much as 20% due to the widespread business shutdowns seen across China and the various port and transportation disruptions.
An OPEC+ technical committee today will hold its third day of talks in Vienna as they try to estimate the extent of the plunge in oil demand and the size of the emerging oil surplus. OPEC is so far hoping for a drop in demand by only about 400,000 bpd for six months, which would lead to an oil supply surplus of about 600,000 bpd in Q1 and 1 million bpd in Q2. However, other forecasters are more pessimistic with S&P Global Platts, for example, predicting a worst-case scenario of a 1 million bpd drop in demand.
In order to prevent the looming surplus, Saudi Arabia is reportedly pushing OPEC+ for a new production cut of 500,000 bpd and possibly as much as 1 million bpd. Russia is reportedly resisting a production cut and wants to simply announce an extension of the current production cut agreement through Q2. For Q1, OPEC+ currently has in place a production cut of 1.7 million bpd, which is 500,000 bpd larger than last year’s production cut of 1.2 million bpd.
The OPEC+ Technical Committee after its meeting will forward its conclusions to OPEC+ members. Saudi Arabia is pushing for an emergency meeting to be held this month, sooner than the regularly-scheduled meeting in March to decide on Q2 production levels. Oil prices saw at least a modest recovery on Wednesday on ideas that OPEC+ has little choice but to cut production farther in order to prevent oil prices from sinking below $50 per barrel on a sustained basis.
The overall environment for the crude oil market remains bearish even aside from the current coronavirus debacle. Any market that depends on torturous negotiations every 3-6 months to artificially restrict production is a market with a downside bias. The simple fact is that there is persistent and long-term excess global oil production capacity. The only long-term solution is a drop in oil prices so that excess supply is eliminated as high-cost producers are eventually forced to halt their unprofitable production.
Strong ADP report bodes well for Friday’s payroll report — Wednesday’s Jan ADP report of +291,000 was much stronger than market expectations of +158,000. The ADP report bodes well for Friday’s U.S. payroll report. The consensus is for Friday’s payroll report to show an increase of +160,000, up from Dec’s weak report of +145,000 but below the 3-month average of +184,000 and the 12-month average of +176,000.
U.S. hiring in January should remain relatively firm since business confidence improved with the US/China trade deal that was announced in mid-December. The coronavirus did not emerge until mid-January. That means that any slowdown in hiring due to the virus is not likely to show up until February since the hiring process takes a matter of weeks before resulting in an actual hire that is reported in the payroll report.
The consensus is for Friday’s Jan unemployment rate to be unchanged from the 50-year low of 3.5% seen in Nov-Dec. The Fed is forecasting that the unemployment rate has bottomed out and will move sideways this year and then move slightly higher to 3.6% by the end of 2021 and to 3.7% by the end of 2022. The Fed expects the labor market to remain tight in the coming years with the unemployment rate remaining below its estimate of a long-term natural unemployment rate of 4.1%.
U.S. productivity expected to improve — The consensus is for today’s Q4 non-farm productivity report to improve to +1.6% from Q3’s dismal rate of -0.2%. Today’s expected report of +1.6% would be a bit better than the 8-quarter average of 1.3% but would be below the post-war average of +2.2%.
Today’s productivity figure will see support from the fact that GDP in Q4 was firm at +2.1%, slightly above the Fed’s estimate of long-term U.S. potential GDP growth of +1.9%. However, U.S. productivity is seeing downward pressure from the fact that U.S. corporations are now heavily staffed after a decade of aggressive hiring. U.S. businesses have hired a net 22.7 million people since the post-crisis labor market trough was hit in 2010.
The markets will welcome any improvement in productivity. An increase in productivity means more efficiency and profits for corporations, as well as the potential for higher real wages for employees. Higher productivity is also positive for a country’s long-term GDP growth potential.
