Good morning everyone, and happy December. The Monday Jump Off is back after a holiday break, and just in time.
Let’s start with OPEC, which will meet this Thursday to discuss oil production levels. The Saudis and Russians have indicated their assent to a renewed production cut agreement, leaving only the remaining details to be worked out at this week’s meeting.
However, don’t look for help from Qatar. The long-participating member will be leaving the cartel in January to focus on its natural gas production, if press releases are to be believed.
This is an interesting turn of events for a relatively small oil producing country and an original member of the cartel. It could be a sign that growing friction between the Qatari and Saudi governments has reached an inflection point. It could also signal that additional structural changes are in the cartel’s future, as even the Saudi government has begun to research its own exit from the cartel.
After the meeting, keep any eye on President Trump’s Twitter for immediate reactions to any deal to prop up prices. They’re sure to be negative, but a price rally will soften the blow for US producers and avoid a slow down in a key economic sector (to say nothing of the strategic importance of US hydro-carbon production).
Moving to Trade, the G-20 concluded without too much fanfare or progress on global trade, but markets were able to exhale as the US and China reached a temporary truce on their trade issues. Full details are hazy still, with both sides seeking to frame this as a win, but for now the US will forestall additional tariffs, and China will increase its purchase of US agricultural products, while also reducing its tariffs on US autos.Whether this will mark an inflection point in US – China trade relations is unclear. The so-called truce is only set to last about 90 days, giving both sides a narrow window to make meaningful progress on the structural and systemic issues which underpin the tariff battle: China’s steel overcapacity; its support and subsidization of SOE’s; its forced technology transfers and related IP abuses; as well as other non-tariff barriers and mercantilist policies which run afoul of free-market theory and, more importantly, WTO rules.
Saving the most important piece for last this morning, President Trump and his executive counterparts in Mexico and Canada have signed off on the USMCA (also known as NAFTA 2.0). Unfortunately, the President also announced his intention to begin the withdrawal process from the original NAFTA.
Why is this important? First, it is unclear whether the President can unilaterally initiate a withdrawal, but let’s set that aside for a moment to look at the larger issue and potential consequences:
#1 – the President cannot unilaterally sign and implement a trade deal. It must be ratified by Congress with implementing legislation.
#2 – numerous Democrats have signaled their opposition to the elements of the current version of the USMCA, and there are some pain points which may generate debate and requests for modification from both sides of the aisle, such as the removal of key dispute resolution mechanisms for cross-border issues. With a split Congress and only a six-month window, starting the withdrawal period seems to ignore the changes in the political landscape and, from an economic perspective, it’s simply dangerous.
#3 – if the President begins the process of NAFTA withdrawal, and there is no NAFTA 2.0 in place, then the legal/commercial rules for trade and business between the US/Canada/Mexico snaps back to pre-1994 rules. Let that sink in: We potentially revert to a legal and economic framework that is more than 24 years in the rearview mirror. This will be devastating to the North American economy, as the WSJ opinion pages note with their headline, “NAFTA Suicide”.
As always, thanks for reading, feel free to share, and here’s a few links of interest.
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