From the Economist’s Chair: Irrational Exuberance

Author David Fyfe, Argus Chief Economist

Events since early November have boosted equities, strengthened crude oil prices, placed a floor under the USD index and moderated some of the recent safe-haven demand for gold.

But market optimism after the US Presidential election, and news of Covid-19 vaccine successes that quickly followed it, could prove short-lived if pandemic impacts worsen further during the northern hemisphere winter. Opec+ Ministers will surely be watching closely.

David Fyfe, Chief Economist for Argus Media, presents this latest podcast and blog post in the “From the Economist’s Chair” series.

Transcript

Hello, I’m David Fyfe, Chief Economist for Argus Media and welcome to another podcast and blog in the “From the Economist’s Chair” series.

Today’s episode is entitled “Irrational Exuberance”

Events since early November have boosted equities, strengthened crude oil prices, placed a floor under the USD index and moderated some of the recent safe-haven demand for gold. But market optimism after the US Presidential election, and news of Covid-19 vaccine successes that quickly followed it, could prove short-lived if pandemic impacts worsen further during the northern hemisphere winter. Opec+ Ministers will surely be watching closely.

Nobody likes to be a killjoy of course, but there is a clear risk of recent market bullishness fading if Covid-19’s winter resurgence in the US and Europe is not checked. When US media networks called Joe Biden as winner of the US Presidential race, there was initial optimism that a new Covid-19 financial rescue package could be close at hand.

But those hopes were dashed as the Presidential incumbent now seeks to challenge election results, and as control of the US Senate looks unlikely to be decided before run-offs in early-January. Congressional bipartisanship, conspicuous by its absence these last four years, seems unlikely to re-emerge before Senate races in Georgia are decided. Even then, a split Congress may struggle to bridge the gap between Republican and Democrat stimulus proposals.

NYMEX WTI & S&P 500

So, the odds appear stacked against a Democrat clean sweep, which would otherwise have cleared the path for a near-$3 trillion rescue-package capable of kick-starting US industrial activity, consumer confidence and commodity demand in the early months of 2021. New funding will eventually become available, but further haggling is likely to delay its deployment until well beyond Inauguration Day.

The post-election weekend saw fevered press speculation about President Trump’s intention to legally challenge an otherwise clear-cut Electoral College victory for challenger Biden. However, market concerns about post-vote turmoil were quickly forgotten on Monday 9 November with news that one of nearly 200 vaccines being tested to provide protection against Covid-19 had achieved 90% success rates in third-phase testing. Other developers have followed suit, citing their own high success rates and raising public expectations that a widely deployable vaccine is imminent.

Spot gold & USD index

Welcome though these signs of vaccine progress are, a durable recovery in commodity and asset markets may still be some months away. Tragically, at mid-November global Covid-19 deaths are averaging nearly 9,000 per day, higher even than in April. Lockdowns and travel restrictions are likely to remain a feature of life for months to come. While initial batches of vaccine may be available for administering to the most vulnerable in the population before the turn of the year, mid-2021 remains a more likely target for widespread global vaccination.

The calculus for Opec+ Ministers as they near their end-November meeting to decide on 2021 output policy looks pretty clear, notwithstanding all the recent hype around the US election and the vaccine. The Opec Secretariat’s own November oil market report was one of several outlooks to cut oil demand expectations for 4Q20 and 1Q21 by well over 1 mb/d compared to prior forecasts. Indeed, our own Argus Fundamentals’ October issue went earlier, and further, curbing 4Q/1Q oil demand by nearer 2 mb/d on average versus earlier projections. These forecast adjustments reflect the impact on oil demand of renewed mobility and commercial activity restrictions in Europe and North America, despite all the encouraging news about vaccine progress.

In short, with Covid-19 still resurgent, and with Libyan oil production seemingly in sustainable recovery mode, there appears little room in the market for an extra 2 mb/d of Opec+ production notionally scheduled for January. While the recent price rally may complicate Opec+ discussions on the matter, the fundamental arithmetic suggests a compelling case for producers to keep existing output curbs in place for a while longer. The question then remains, is that for three months or six months?

Thank you for listening to this podcast from Argus Media, and don’t forget to check www.argusmedia.com for news, opinion and commodity pricing information.

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