The Geopolitics of Oil As It Affects Syria And Russia Should Be Of Concern To Everyone

A week that started with fear over what the Federal Reserve might do in its meeting just concluded this past Wednesday, ended up being a good week for equities, and, in spite of major bumps in the road, a very good week for crude. Gold seems to be puzzled by what went down at the Federal Open Market Committee meeting on Wednesday.

Let’s start with gold. It hit its lowest point in nine weeks on Friday, a slip that not even a weaker U.S. dollar could help much. The yellow precious metal seemed to misread or at the very least was uninterested in very soft inflation numbers released today by the United States Department of Commerce. *

The Fed said that it would still strongly take into consideration the data points of its twin mandate, i.e., employment and inflation. It did fail to mention major concerns with other economies. So, the beat goes on with the twin mandate facts and figures.

Major stock indexes hovered a touch lower at 3:30 in New York, while remaining on track for gains of nearly about 1.00% for the week. The averages are on pace for gains of nearly 9% or more for October, turning in their best month since October 2011. 

"You still have very simulative measures," said Nick Raich, CEO of The Earnings Scout. "You have people who performance chases into the end of the month. It's been a phenomenal October." 

Some of this better performance is due to a revived China – or at least one that investors are more comfortable with in its slower and lower growth trajectory.

Broadly speaking, the watchword is “accommodative,” whether it is China’s snap lowering of interest rates, Europe’s dovish QE talk without much action or Japan’s consideration of a more accommodative monetary policy.

Heard on the streets of New York this week, though: “What kind of work will people do in the future? Seems we need fewer people to produce more things…”

West Texas Intermediate crude and Brent North Sea rose today, giving Wednesday’s rally some legs and causing some to say the soft prices of October will give way to higher ones come November and December.

Both benchmarks were headed for their first weekly gain in three, helped largely by Wednesday's 6% rally, which was driven by a smaller build in U.S. crude than was anticipated and falls in gasoline and diesel stockpiles greater than forecast.

CNBC said: U.S. oil drillers removed 16 rigs in the week ended Oct. 30, bringing the total rig count down to 578, the least since June 2010, oil Services Company Baker Hughes Inc. said in its closely followed report.

Don’t expect the oil rally to last. The drop in U.S. rig counts and the sucking sound at the stockpile depots is a cause, rather than an effect of a worldwide gut. Until Saudi Arabia says that they are slowing production, prices will remain weak.

Try not to repeat the misapprehension that somehow the Saudis are trying to dismantle the American capacity to pump oil. Far from it. It’s the Russians the Saudis want to cripple. Now that the Russians have landed in Syria, you can bet your last dollar the high-volume pumping from OPEC will continue till Saudi Arabia can’t afford to keep prices so extremely low anymore.

And Iran will have to sell oil at the Saudi-set prices once they are fully ramped up. Our general assessment is that there is going to be a surplus until 2018, which is a bit longer than most experts believe.

To circle back around to Russia and its predicament (mostly of it own doing), if oil prices don’t rise substantially above $50 per barrel in 2016, Russia’s reserve fund, constantly tapped to cover budgetary shortfalls, will run out. Period. That means Russia will have to float its government paper on the open market. As you can imagine, Russia doesn’t have the best credit scores.

Earlier this year, Russian Finance Minister Siluanov expressed how important the Fund was for Russia. He said, "We lose stability without reserves.” So, we might view the adventure in Syria as a distracting show put on for the benefit of the Russian people. Russia's economy shrank 4.3% in Q3 of 2015.

There was a cluster of inflation figures released today in the U.S. None of the components in the cluster supported higher interest rates in December by the FOMC.

That drove 10-year bond prices down closer to 2.00%. To reinforce our points above about Russia, that country’s 10-year yield is around 10% right now, having fallen significantly since mid-year 2015. However, once the oil revenue and reserve fund dry up, cash can’t back the bonds on hand.

*Personal income ticked up 0.1% in September, the smallest gain since March, and consumer spending for August rose 0.1%. Meanwhile, the personal consumption expenditures (PCE) price index rose 0.2%, the smallest increase since April.

Wishing you as always, good trading,