By Tim Daiss
It seems that the Federal Reserve can’t get a break. For months, President Trump has been increasingly criticizing the Fed’s policy of incrementally increasing interest rates, a near-unprecedented move for an American president. After the most recent Fed move to hike interest rates by a quarter of a percentage point last week, Trump tweeted on Monday that the Fed was the “only problem our economy has.”
“They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders. The Fed is like a powerful golfer who can’t score because he has no touch — he can’t putt!” Trump added in his tweet. Trump’s remarks sent the White House scrambling on damage control mode, trying to ensure both domestic and global markets that the president was not about to try to remove Fed chairman Jerome Powell from office. Stock markets plunged the next day as worries over U.S. leadership waned as well as other economic concerns. An Associated Press (AP) report said Trump’s latest tweet attacking the Fed was met with concern that any effort to diminish Powell or remove him as chairman could destabilize the economy.
Now, criticism over Fed policy is coming from an unlikely place – Russia. The head of Russian oil giant Rosneft, Igor Sechin, said yesterday the slump in global oil prices was mostly linked to a fresh interest rate hike announced by the U.S. Federal Reserve last week. He added that he saw oil prices at $50-53 per barrel next year.
Not only is it noteworthy that the head of a foreign oil company would criticize the Federal Reserve, but it could open the floodgates for more criticism over Fed policy, second-guessing and angst over what should remain an institution undeterred by both domestic and international politics.
Another takeaway from Sechin’s comments is what is likely growing concern among not only Russian oil production companies, but Moscow itself, over oil prices that have plunged around 40 percent since hitting multi-year highs in October. Prices remain in the doldrums over concerns about the global economy, ongoing trade tensions between Washington and Beijing, though there is a temporary freeze on increased tariffs until at least March 2, slowing oil demand growth in 2019 and record oil production, mostly coming from the U.S., Russia and Saudi Arabia – the world’s top three oil producers.
The unknown variable in the oil markets equation is how markets will respond in January going forward when the OPEC+ deal reached earlier this month to trim 1.2 million b/d will impact an anticipated oil supply overhang. So far, it appears that the market has largely discounted the oil output cut, signaling that more action could be needed, particularly from both oil production heavy weights Saudi Arabia and Russia. It also remains to be seen if U.S. shale oil production will continue on its record-setting pace into 2019. However, it appears that U.S. production could push ahead despite prices for West Texas Intermediate (WTI) crude futures having settled in the mid-$40s price point, well below the oil production break-even price for a number of producers.
U.S. shale oil production
Baker Hughes reported a 9-rig increase for oil and gas in the U.S. last week – a turnaround from three losses in a row in the three prior weeks. The total number of active oil and gas drilling rigs in the country now stands at 1,080 according to the report, with the number of active oil rigs increasing by 10 to reach 883 and the number of gas rigs decreasing by 1 to 197. The oil and gas rig count is now 149 up from this time last year, 136 of which is in oil production rigs.
Dwindling state coffers
The stakes are high for not only the global economy, oil companies, and developing market economies (which seem to be most severely hit when equity and oil markets fluctuate too much as well as struggling with a strong U.S. dollar), but also for Riyadh and Moscow, since both are largely dependent on oil revenue for state coffers. While both countries are already seeing those revenues decline precariously over the last two months, it appears that Saudi Arabia could take the largest hit as its economy is less diversified than Russia.