Tales of oil, monetary policy and Latino downfalls

Hello there (to quote Obi-Wan Kenobi),

Let’s go over a short recap:

Oil price recovery is not expected until 2017, given that demand is continuously overwhelmed by supply (think of huge OPEC outputs, see below)

Senor Draghi pledges to extend QE until March 2017, with a strong possibility of extension — markets reacted in disappointment, having waited for a stronger ECB effort

Brazil is tumbling, with GDP shrinking at a faster pace than analysts predicted — case study

A surprise for Star Wars and macroeconomics fans :)

1. According to the world’s largest independent oil traders, 2016 brings a demand strongly overwhelmed by supply

In other words, OPEC (which produces about 40% of the world’s oil) is in big trouble. To give you a wider picture perspective on the issue, watch this:

The essentially flat evolution between 2011 and 2014 is, pardon my French, going down the toilet, with OPEC continuously producing.

The interesting case study is Saudi Arabia, OPEC’s top producer, which has even raised production to a record of almost 10.6 million barrels per day in July. Here’s that bit of info in context:

Other OPEC members have called for a cut in production to add a few cents to the tumbling prices. On the other hand, Iranian production is on the rise, considering there’s a big chance of sanctions being lifted next year. With the barrels that these guys can add to the market, there’s really no price recovery at the horizon.

The curious aspect is still Saudi Arabia: what’s their play? Are they hoarding it all and waiting for a jumpstart in demand in 2017–2018? If so, can they actually “survive” until then? Time will tell — definitely worth studying — more on it here.

2. ECB pledges to continue the EUR 60 billion per month bond buying program until at least March 2017

The decision package included something more: policymakers also cut a key interest rate to a historic minimum of -0.3% and pledged to buy more assets with the proceeds of its existing bond purchases. Moreover, the ECB supported these decisions by pledging to buy municipal bonds in addition to standard government debt.

The investors verdict: unimpressive. Most were expecting a stronger move on the part of the ECB, i.e. deeper cuts and a bit more monthly purchases.

Traders lost big time after betting heavily on further EUR fall, which in fact rocketed 3% against the USD for its biggest one day jump in 6 years:

Draghi maintains these measures reinforce the eurozone’s recovery momentum. Whether he’s right or not, we’ll see. Until then, check the wider covering piece here.

3. GS announces Brazil’s downfall, as Latin America’s largest economy shrank 1.7% in Q3

That number is in fact worse than all but three estimates from 44 economists surveyed by Bloomberg. To give you a perspective on the matter, this Q3 drop marks the first three quarter contraction since 1996, with a seasonally adjusted annual drop of almost 7%.

The causes for such a dire situation? According to Alberto Ramos, chief Latin America economist at GS:

“What started as a recession driven by the adjustment needs of an economy that accumulated large macro imbalances is now mutating into an outright economic depression given the deep contraction of domestic demand.”

The confidence levels are pretty close to their lowest in a decade. Shoppers’ sentiment is tumbling, the while jobless rate increased 2% yoy to 8.9% in September. In fact, according to local researchers, there seems to be no room for growth in the coming quarters. More on the issue here.

4. Destroying the Death Star would trigger a huge financial meltdown in that far, far away galaxy

While researching publications and what not for news worthy to present to you, we found an amazing piece dedicated to a particular type of geek: loves Star Wars, loves macroeconomics.

Here, you can find a very cool analysis on Death Star valuation, the economic warfare conducted by the Galactic Empire and its ramifications, as well as the implications brought upon by Luke Skywalker’s successful torpedo launch on the first DS.

To give you a small flavor, the first DS is estimated at $193 quintillion (including R&D).

How the Rebel Alliance would have to bail out the entire galactic economy after it’s victory in Return of the Jedi, that’s for you to find out.

Until next time!

The YLC Team