Saudis Target $100 Oil

Oil and other commodities rallied on the news.

The reason was talk that Saudi Arabia has its sights on $80-$100 a barrel oil.  Speculation about more U.S. sanctions on Russia was also a contributing factor.  At the same time, there was a strong rally in other resource stocks.  And the implication of these rallies for the #inflation outlook hit fixed-income assets hard.

Such increases, if sustained, could fuel inflationary pressures.  As a result, investors hedged by selling sovereign bonds.  Yields on U.S. two-year Treasuries stood at levels last visited in 2008 at 2.43 percent.  And 10-year German yields went above 0.57 percent for the first time in almost a month.

Reuters reported on Wednesday that top oil exporter Saudi Arabia would be happy for crude to reach $80 or even $100 a barrel.  This was interpreted to mean that Riyadh will not seek changes to the supply pact.  Since the start of the supply cuts, crude inventories have declined gradually from record highs toward long-term average levels.  In the United States, the Energy Information Administration (EIA) reported that commercial crude stocks fell close to 420 million barrels. This is close to their five-year average.

Aluminum and nickel led the advance of other commoditiesFederal Reserve’s Beige Book report showed a solid outlook for the economy despite trade concerns.

Meanwhile, sovereign debt investors expressed concern about the effect of rising commodity prices and the threat of inflation.  In addition, the IMF warned that sovereign debt is at historic highs.  Total debt levels globally reached $164 trillion in 2016.  This represents 225 percent of the world economy’s gross domestic product.  Furthermore, that level of debt was 12 percentage points steeper than the last historic high seen in 2009 immediately after the global financial crisis.

Vitor Gaspar is director of the fiscal affairs department at the IMF.  “The United States is the only country where the public debt-to-GDP ratio will increase. It will increase from 108 percent of GDP in 2017 to 117 percent in 2023.” This is attributable to a combination of the spending plan passed by Congress and recent tax cuts.

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