Doha may drive oil higher

Outlook:

We have a ton of fresh data this week, including US CPI and PPI, the Beige Book, retail sales and industrial production. But the biggie will be the API inventory report at 4:30 ET this afternoon and then tomorrow’s Energy Dept version.

So far we have a forecast for the latest week’s inventory at a gain of 2.8 million barrels. We also get Chinese data on oil imports tomorrow.

The fresh data may cause some oil price gyrations but in the end, it’s Doha that counts. Our scenario is for a most or less straight line upwards to some overly high price, like $48, or another $5. Maybe more. This is pure “buy on the rumor.” After the conference, we will get “sell on the news” regardless of the outcome.

But it’s clear that the outcome will be favorable for oil prices in the longer run, even if the effort to build a new cartel runs into all the same issues that OPEC could not overcome, chiefly quota enforcement. Remember that Opec will wildly successful in its first years. The Doha output freeze agreement will likely be equally successful, if not more so because of the inclusion of non-Arab and non-Opec participants. Maybe the Doha gang will hire the Russian mob as enforcers.

The West in general and the US in particular dislikes new initiatives and institutions that exclude it, hence the snotty response to China’s emerging market investment bank and to the Doha Group now.
Tough cookies. Saudi Arabia and Russia are the least likely candidates you can imagine to form a new global entity that actually delivers its goals. You can think of twenty-seven reasons in ten seconds why Doha should fail, not least because these guys can’t manage their way out of a paper bag. It’s takes a Wharton MBA or Jack Welch to set up an entirely new global institution.

Well, no. The Middle East and Russia have each been doing business on a handshake for centuries.
When the motivation is high enough, just about any group of parties with the same self-interest can overcome other differences to get a job done. Now is one of those times we wish for a crystal ball to see the net result five years from now. In twenty years, Doha will probably be gone, to be sure, but we say Goldman and the other skeptics are making a big mistake asserting that market forces, aka supply and demand, will make the Doha group irrelevant or a failure.

What is nearly irrelevant is the US bond market as a reflection or a determinant. The astute Market News fixed income reporter quotes various bond market players as discouraged over the small range-bound moves. One reports "For every uptick in oil or stability in risk assets, Treasury yields remain confined in a tight space. What started in the first quarter as a haven trade to high grade bonds has become a long slog in the Fed's waiting room - with no interesting magazines. The cash that was on hold for a signal from the Fed seeps into the bond market almost every day now."

Even JP Morgan admits "It is something of a conundrum why yields on Treasuries are as low as they are. Its ”fair value model” indicates the 10-year yield should be 31 bp higher, i.e., over 2.0%. Current yields are “just over one standard deviation lower than what fundamentals suggest is appropriate." And here’s another alluring idea: the Nomura analyst says "core government bond markets continue to feed off each other and this seems to be the only important factor for how the back-end of G4 curves trade vis-a-vis each other."

If we understand this remark, it means each benchmark is being set at least in part according to how the others are being set, so that differentials are losing their power. Yesterday, the Bund yield was the lowest in a year at 0.074% at one point. Note that the actual lowest low was 0.0485% posted on April 17, 2015. Does a drop in Bunds lead to a drop in US notes, too?

Japanese bond yields are also a little strange. Yesterday the low yield was -0.088% and this morning we have -0.095%. The record low was -0.125% on March 18. There seems to be little correlation with either the yen or the data. This is presumably because the BoJ is up a tree. There is pressure for the BoJ to do something, anything, to goose the economy. Recently we had a slew of comments to the effect that negative rates had better not last too long lest they destroy the economy and the financial markets. The BoJ meets April 27-28. What can Japan possibly do if the floor on negative yields is -0.10%?

Well, there’s always the yen. We have only the faintest of rumblings from the MoF that intervention might become warranted if conditions are “extreme,” but we guess that condition was met without the intervention response. Now it’s too late. There is the smallest of possibilities that the IMF and World Bank, meeting now in Washington, could give a nod to coordinated intervention, as we had after the last natural disaster, but the more likely venue is G7, meeting in Japan on May 26-27. That’s not all that far off and preparations have already started. Maybe we’ll get a leak.

If we are right about Doha driving oil higher, the dollar will be toast until we get the communique from the meeting, and maybe longer if the story is credible.

		Current	Signal	Signal	Signal
Currency	Spot	Position	Strength	Date	Rate	Gain/Loss
USD/JPY	108.34	SHORT USD	WEAK	02/04/16	117.57	7.85%
GBP/USD	1.4309	LONG GBP	NEW*WEAK	04/12/16	1.4309	0.00%
EUR/USD	1.1422	LONG EURO	WEAK	03/11/16	1.1094	2.96%
EUR/JPY	123.75	LONG EURO	STRONG	03/29/16	127.24	-2.74%
EUR/GBP	0.7982	LONG EURO	WEAK	03/11/16	0.7759	2.87%
USD/CHF	0.9523	SHORT USD	STRONG	03/11/16	0.9877	3.58%
USD/CAD	1.2859	SHORT USD	STRONG	02/01/16	1.4031	8.35%
NZD/USD	0.6893	LONG NZD	STRONG	02/01/16	0.6478	6.41%
AUD/USD	0.7657	LONG AUD	STRONG	01/25/16	0.6980	9.70%
AUD/JPY	82.97	LONG AUD	WEAK	03/03/16	83.57	-0.72%
USD/MXN	17.6632	SHORT USD	STRONG	02/23/16	18.1208	2.53%