Global Energy

The good news in Friday’s bad news on US employment was that the prices of crude oil and gasoline took a dive. These falling prices aren’t good news if they reflect a substantial weakening in demand for petroleum products caused by rapidly declining global economic activity. However, that’s not what is happening, in my opinion. Granted that Friday’s employment report was weaker than expected, but payrolls are still rising in the US. At the beginning of the week, April’s manufacturing PMIs confirmed that Europe is in a recession, but the US and China continue to expand.

Petroleum prices are falling for all of the reasons I discussed on Thursday, April 26, when I wrote, “The rally in crude oil seems to be running out of gas. That’s good for the US economy. Stable or even lower fuel costs should fuel consumer spending, which cruised along surprisingly well at the beginning of this year despite the surge in fuel prices. Stable or even lower crude oil prices should reduce inflationary pressures around the world. This is especially important in emerging economies since fuel costs account for larger shares of budgets than in developed economies. This would allow the central banks in China, India, and Brazil to continue to ease their monetary policies, as they have been in recent months.” Let's review the latest developments:

(1) The nearby futures price of a barrel of Brent dropped $3.68 on Friday. It is down from this year’s peak of $126.21 on March 9 to $112.51 this morning. The price of NYMEX WTI crude plunged $4.05 on Friday. It peaked at $109.77 on February 24 and is down to $97.58 this morning. On NYMEX, the nearby futures price of a gallon of gasoline fell 7.42 cents on Friday. It has dropped 45 cents from $3.42 on March 26 to $2.97 this morning.

(2) The drop in oil prices is occurring despite the tightening of sanctions on Iran, which are reducing that country’s oil exports and revenues significantly. India is the latest nation to reduce its imports from Iran, while increasing its imports from Saudi Arabia and Iraq. Saudi Arabia is reportedly pumping 10mbd to offset the shortfall of Iran oil supplies. If the price of oil continues to decline, OPEC will probably respond by lowering output.

(3) A second round of nuclear negotiations between Iran and the “P5+1” powers starts on May 23. The sanctions seem to be working. Indeed, on Wednesday, a chief adviser to Iran's supreme leader told local media that Tehran's "minimum expectation" for the talks in Baghdad is the lifting of sanctions against Iran. To date, the measures have reduced Tehran's oil sales and hindered Iranian banks from accessing most oil revenues held in accounts overseas. In January, the European Union formally agreed to an oil embargo starting July 1. Inflation exceeds 20% in Iran, and unemployment is rising rapidly.

(4) Meanwhile, in Israel, Prime Minister Benjamin Netanyahu called today for an early general election on September 4. That reduces the likelihood that Israel will attack Iran between now and then. Besides, there is a growing debate within the government about whether such an attack makes any sense. Recent polls show a wide majority of Israelis either oppose an Israeli strike on Iran or would favor an attack only if it were carried out with US agreement.

Today's Morning Briefing: Some Bad & Good News (1) Payrolls are weak, while labor market indicators are mixed. (2) Less firing. More hiring. (3) Deconstructing the seasonal distortion. (4) Blaming Washington if job gains don’t rebound. (5) Are falling oil prices good news or bad? (6) No shortage of oil. (7) Sanctions could squeeze Iran into submission. (8) Israel’s debating society. (9) From Merkozy to Merlande? (10) “Chaos” is a Greek word. (11) Idling in neutral on US stocks for now. (12) Still bearish on European bourses. (More for subscribers.)