Russell 2000 continues recent run, Oil prices dip despite output cuts

US equity markets bounced back in morning trade, again led by the Russell 2000, after yesterday’s worries about the pace of rate cuts, as traders ignored anything but a rosy rate cutting in 2024. Oil prices slipped, down 1.3%, despite various indications that oil output will be cut next year by Saudi Arabia and Russia, the world’s top two producers.

Markets will be closed Monday for Christmas, before reopening for a thinly traded shortened week ahead of the three-day New Year holiday weekend. Many traders will be absent next week, and market-moving headlines are expected to be slow. We wish our readers a happy and prosperous New Year.

TODAY’S MAJOR NEWS

Is OPEC+ losing its grip?

Commentators questioned OPEC+’s traditional control of oil output and, indirectly, the oil price, when the cartel delayed its scheduled meeting in order to negotiate something that its members could live with before going public. There’s a growing sense that some members are dissatisfied with lower output combined with lower prices. There is a temptation to cheat the cartel agreement, increasing output to increase total revenues.

Saudi Arabia has provided the most recent cuts, and as such it seems to be growing impatient with other members. It was able to get an agreement for cuts for January, but Angola then withdrew from OPEC in protest; while not a major producer at 1.13 million barrels per day, Angola’s departure may reflect problems within the cartel that could lead other members to either cheat or depart as well, risking a greater flood of supplies in the coming months.

Russian oil production and exports decline, cutting global supply

Russia has announced further production cuts, just as the US and its allies are tightening Russia’s oil price cap compliance system, making cheating harder. Russia has generally become adept at bypassing restrictions, but these updates will be targeting the 1M-1.5M barrels per day that was theoretically covered by the price cap restrictions. A declaration will now be required every time Russian oil is loaded onto a vessel to determine its sale, while the US has sanctioned a number of Hong Kong and UAE based traders for bypassing sanctions. Russia is the world’s second largest crude oil exporter behind Saudi Arabia, and it has supplied around 3.2M bbd of seaborne exports in 2023, as well as 0.25M bbd via the Druzhba pipeline to Slovakia, Czechia, and Hungary. China imports a total of around 2M bbd from Russia, of which roughly half arrives via pipeline and train, meaning the total export figure is close to 4.5M bbd.

The latest measures are unlikely to have a significant impact on flows. The sanctioned traders are domiciled in geographies with significant Russian oil trade, much of which is detached from the global oil trade. Business can continue exclusively within these regions; Russia and India account for 75% of Russia’s oil exports. Tankers continue to be sold to firms transporting Russian oil, meaning there are few structural obstacles to the continuation of the status quo.

US GDP still running hot

Despite a small reduction, today’s Q3 GDP data was still solid although traders interpreted them as moving in the right direction to support a Fed pivot

• Gross domestic product rose at an annualized rate of 4.9% in the third quarter, according to today’s revised data for the quarter, a downward adjustment from 5.2% GDP growth previously reported
• Personal consumption expenditures rose at an annualized rate of 3.1% in the third quarter, a downward revision from 3.6% previously
• The downturn in manufacturing activity in the Philadelphia region worsened more than expected in December, with the Manufacturing Business Outlook Survey found that the current general activity index dropped to -10.5 this month, wore than the expected -3.0, and down from -5.9 in November
• This follows a 23.6-point decline in the New York manufacturing index
• The Philly index has been below zero for 17 of the last 19 months
• The new orders index dropped sharply to -25.6 from 1.3 in December
• The shipments index rose 7 points from last month, but was still -10.8

Little change in tight labor market 

• First-time claims for unemployment benefits rose slightly to 205,00 in the week ending December 16, up from 203,000 the previous week, but below analyst expectations of 210K,000 claims
• That dropped the four-week moving average to 212,000 claims, down from 213,500 the previous week
• Continuing claims for the week ending December 9 slipped to 1.865 million, down from the previous week
• The four-week moving average rose by 6,000 to 1.878 million claims

TODAY’S MAJOR MARKETS

Russell 2000 leads market rise, again

• The Russell 2000 was up 1.0% in morning trade, with the S&P 500, Nasdaq, and Dow Jones joining back in the rally, all up 0.4%
• The Nikkei 225 sold off by 1.6% after the BoJ held interest rates unchanged, while the the FTSE 100 and DAX were down 0.3%
• The VIX, Wall Street’s fear index, spiked up to 14.35

Bonds and Dollar weaker

• Bonds were modestly weaker, with10-year TIPS index-linked yields at 1.70%, with 2- and 10-year yields rising to 4.34% and 3.8%, respectively
• The dollar index slipped 0.5% to 102.0
• Versus the dollar, the Yen was up 0.8%, Sterling was up 0.2%, and the Euro was down 0.4%

Oil prices fall

• Oil prices fell 1.3% to $73.3 per barrel
• Gold prices rose 0.3% to $2,054 per ounce, while Silver prices were unchanged $24.6 per ounce
• The grain and oilseed sector were mixed

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]

Market outlook by Paul Walton, Financial Writer: [email protected]