Stocks finished June at all-time highs and that strength has carried into July, as over just six trading sessions, the S&P 500 is up over 1.6% month-to-date and has closed green seven of the last ten trading days. Bonds, which struggled in the first quarter, have also seen strength as the 10-Year US Treasury yield fell to as low as 1.25% on Thursday, its lowest levels since February, and with falling interest rates equating to higher bond prices, fixed income has quietly performed well over the last two months. Entering next week, investors have plenty to monitor as the banks kick off the second quarter earnings season and the consumer price index (CPI), producer price index (PPI), and retail sales reports for June will all be released.
Last week, OPEC+, which is the Organization of the Petroleum Exporting Countries (OPEC) and a group of Russian oil producers, got together with designs to boost crude oil output by further reducing the production cuts they enacted at the start of the pandemic. Back in April 2020, the group agreed to cut 9.7 million barrels a day, or about 10% of 2019 demand, and the group has since reinstated about 4 million barrels a day. Many of the members in OPEC+ are very reliant on petro-dollars to fund their governments and economies, however, and with oil prices recently climbing to multi-year highs and brent crude up over 40% in 2021, we have wondered how long OPEC+ could maintain a unified and compliant production strategy.
Cracks have suddenly emerged as the United Arab Emirates (UAE), an OPEC member since 1967, has publicly jettisoned talks as it seeks to not only increase production, but simultaneously expand market share and accelerate oil revenues for the diversification of its economy. Saudi Arabia has rejected the UAE request and a rift has reportedly opened that could potentially lead to the UAE leaving OPEC. The market response has been uncertain, as prices initially rose on fears that no deal would create a tighter market, then reversed and finished lower on the prospect of more supply potentially hitting global markets if OPEC+ production cut compliance ebbed. Prices have continued to seesaw and on Friday closed back near recent highs. Ultimately, this recent development undermines the ability of OPEC+ to deliver oil market stability and we anticipate choppy trading for energy markets as long as this public rift lingers.
Ian G. Browning, CFA | Director, Investment Strategies & Shareholder
Peter E. Simmons, JD | President & CEO