As Price of Oil Slides, OPEC Plus May Weigh Further Production Cuts
By Stanley Reed, The New York Times, 6/2/2023
MarketMinder’s View: This piece spends a lot of time on the politicking behind OPEC and its partners’ (collectively known as OPEC+) production quota decisions, assessing their competing motivations to try to divine the likelihood that they will announce cuts this weekend. That is all interesting and fun in a very nerdy sense of the term, though these decisions aren’t market functions and are impossible to predict. Our interest here is mainly with the discussion of what OPEC+ means for oil prices, and on that front, we think it is a mixed bag. Helpfully, it points out that April’s much-feared production cut didn’t bring higher prices and, despite a brief spike, crude is now trading below where it was beforehand. But it omits the most critical factor here, which is that OPEC+ targets rarely translate to actual production. Most of the participating nations routinely undershoot their quotas, and actual production cuts have been far less than the quota cuts stealing so many headlines. The last couple of times, production barely budged, and the cuts merely brought the targets closer to reality. There is still some room between the two, so we are skeptical that another round of cuts now would have a meaningful impact, especially with production in non-cartel nation (e.g., the US, Brazil and others) still ramping up. For more, see early April’s commentary, “Oil’s OPEC+ Plus Sign Isn’t Assured to Last.”
Global Food Costs at 2-Year Low but Grocery Bills Stay High
By Agnieszka de Sousa and Áine Quinn, Bloomberg, 6/2/2023
MarketMinder’s View: This short and sweet piece makes two helpful points for investors trying to glean how high food prices will affect inflation (and therefor investor sentiment) moving forward. One, positively, global food commodity prices continue falling, with the UN’s gauge now down 22% from its peak after Russia invaded Ukraine last year. However, that hasn’t much filtered through to supermarket shelves, in part because local supply and demand trends matter a lot. To that, we would add a silver lining: Suppliers tend to ink long-term contracts. Those are currently set at last year’s prices, but as they roll over, costs should fall—and so should food prices, given the wealth of evidence that supply crunches are easing.
Banks Raise Roadblocks to Small-Business Loans
By Ruth Simon, The Wall Street Journal, 6/2/2023
MarketMinder’s View: This long but interesting article mentions a number of companies, some publicly traded, so we remind readers that MarketMinder doesn’t make individual security recommendations—we feature this for the broader theme only. That theme, illustrated with anecdotal evidence writ large, is that small banks are tightening credit to small businesses, which are now finding it more difficult and expensive to finance expansion. The article ties this to higher funding costs and stricter risk management after Silicon Valley Bank and Signature Bank failed in March, implying these issues will bring a delayed economic impact. Maybe, but we see a few things worth noting when we look at the actual data. One, small banks’ business lending started flattening out and even drifting lower last autumn—this isn’t a new development, and it hasn’t yet quashed business investment. Two, after the transfer of Signature Bank’s assets to the FDIC caused a sharp drop in outstanding small bank business loans—an accounting maneuver, not a real-world credit drop—lending is up a wee bit. Three, if a recession were to develop, it isn’t unusual for small businesses to get hit hardest by tightening credit standards, so nothing here appears out of the ordinary aside from the general sense that the problem here is businesses are having trouble expanding to meet burgeoning demand. That isn’t recessionary. And, finally, for stocks, if a recession arrives, it is worth considering that markets typically move ahead of the economy, implying last year’s decline may have pre-priced it to a considerable degree.