Geopolitics and Markets Review – 3rd April 2023

Sections:

1) OPEC+ Cuts Oil Production

2) Stock Market Liquidity

3) Binance Sued By CFTC

4) The Open Letter To Pause AI Development Above GPT-4

5) UK’s Trans-Pacific Trade Deal

6) De-Dollarisation

7) China and France Settle LNG Deal In Yuan

8) My Thoughts of the Week

9) My Current Reading

---

OPEC Oil Cuts

Yesterday, OPEC+ announced more cuts to oil production. Production will be cut by an extra 1.16 million barrels per day (bpd). Russia also announced it would extend its 500,000-bpd oil production cut until at least the end of 2023.

OPEC has pricing power over oil, so we would need a massive demand drop seen in a global recession to see prices drop too far. As these countries in OPEC benefit from higher oil prices, they will cut production to counter any price drops in oil. Should the US have refilled their SPR, rather than engaging in pricing battles with OPEC that they aren’t going to win by emptying their own? They are shooting themselves in the foot.

The Chinese SPR is very full, and the US SPR is the emptiest it’s been in over 40 years. As a strategic reserve, having less in it coincides with having fewer strategic options. Internal political games ensure the releases keep coming from the SPR as the Biden administration wants to remain in office, and low gasoline prices seem to be his strategy. The pricing power OPEC has over oil makes this a tough game to play.

As Powell also still wants to get inflation back to his 2% target, any price rises in oil are strongly correlated to inflation rises. In shattered relationships in a future multipolar world order, supply chain inflation will linger in the background and emerge in strong spikes.

In short, it's OPEC pricing through production cuts vs U.S SPR releases, but if prices of oil rise too far, could demand destruction contribute to a U.S recession?

WTI and Brent are up 6.57% and 6.38% respectively at the time of writing. My alerts around the 50, 100-day moving averages were triggered this morning, but the price is still below the 200-day moving average which sits at around 89.53 on WTI.

---

Liquidity

Risk-on because the only important element in the financial markets is liquidity. The Federal Reserve balance sheet currently appears to be the only chart that is driving where capital is being parked in the financial markets.

Quantitative tightening, the process of reducing the size of the Fed’s balance sheet through selling treasuries and other methods removes liquidity from the stock markets. In 2020, when stimulus checks were handed out, when interest rates were at 1000-year lows, money flowed into the stock markets riskiest assets with the hope of gaining a return that wasn’t seen in treasuries.