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Last week’s confirmation that the Federal Reserve will continue to outpace its major central bank counterparts continues to propel the dollar higher this morning – and concern that the trade conflict brewing between China and the United States could descend into trench warfare looks likely to keep risk premia elevated through the week ahead.

However, wars underway within two of the world’s most powerful cartels – FIFA and OPEC – are also likely to play a significant role in driving markets. World Cup matches are likely to reduce liquidity by distracting traders (see “Pitch, not the Pit” link below) – while a far less-sportsmanlike contest between the largest oil producers will also trigger volatility.

Oil rallied after President Trump’s decision to abrogate the Iran nuclear deal in early May, but the expectation that a tightening market will trigger an output increase has pulled prices down by nearly 10 percent since then. This has driven a number of commodity-linked currencies to sustained losses – but a meeting of the Organization of the Petroleum Exporting Countries in Vienna this week could help to put a floor under prices.

Saudi Arabia may have been absolutely crushed by Russia during its first match at the World Cup, but the two countries are tightly aligned in wanting to open the taps – both countries are pumping below capacity and seek to keep the market in balance over the long term. The Saudis are also coming under sustained pressure from a Trump administration that is seeking lower prices as the midterm elections approach and has enacted a number of policies that support the regime’s political goals – including sanctions on Iran.

Last week, Russian energy minister Alexander Novak said that the group and its allies were considering increasing output by up to 1.5 million barrels a day – however, according to a Bloomberg report last night, Iran, Iraq and Venezuela are planning to stonewall any rise in production. The three countries control roughly 50 percent of the group’s oil reserves, but for varying reasons are largely unable to grow output. Hyperinflation, crippling debt levels, and political dysfunction have crippled Venezuela, Iraq’s efforts to rebuild capacity are progressing slowly, and Iran is facing Western sanctions.

Iran’s representative Hossein Kazempour Ardebili said, “Three OPEC founders are going to stop it. If the Kingdom of Saudi Arabia and Russia want to increase production, this requires unanimity. If the two want to act alone, that’s a breach of the cooperation agreement…We call upon our brothers in OPEC and Russia that we do not need to appease Trump, who sanctions two OPEC founders and also Russia. We are sovereign nations driven by our own responsibilities and values. The whole world has to stand against these arrogant attitudes – and will”.

At an event that is amusingly entitled “Cooperation for a Sustainable Future”, it may prove far too difficult to reconcile extremely disparate positions across the 24-member group. There is some precedent for a supply increase agreed outside the bloc, but a gradually-paced compromise extension amounting to 250,000 to 750,000 barrels a day looks more probable. Compliance levels are also unlikely to return to the levels reached in the last two years, meaning that producers with the flexibility to expand output could pump more oil at the margins – reducing tightness in markets over the longer term, while reducing the viability of the cartel itself.

Ultimately, although OPEC will provide drama for oil traders in the days ahead, FIFA looks likely become the world’s most effective cartel once again…

Have a great week!

Counterparties: Background Reading

New York Times: Fear of a Trade War Is Straining the Global Economy
The Atlantic: There’s Something Fishy About US-Canada Trade Wars
Wall Street Journal: The Finance Industry’s Incredible Ability to Keep the Money Rolling In
The Economist: The Crooked Timber of Humanity
Behavioral Scientist: A Behavioral Scientist’s Guide to (Not) Betting on the 2018 World Cup
New Yorker: Kim Jong Un Offers to Host Peace Talks Between United States and Canada
Gabriel Zucman: The Missing Profits of Nations
MacroPolo: Hukuo
Ehrmann, Jansen: The Pitch, Not the Pit

Catalysts: Scheduled Data Releases

13:00   *          USD Federal Reserve Speech, Bostic
21:30   *          AUD Reserve Bank of Australia, Meeting Minutes

04:00   *          EUR Euro-Zone Current Account, April
04:00   **        EUR Sintra Central Bank Speeches, Draghi
07:00   *          EUR Sintra Central Bank Speeches, Lane, Bullard
19:50   *          JPY Bank of Japan, Meeting Minutes

08:30   *          USD Current Account Balance, Q1
09:30   **        EUR Sintra Central Bank Speeches, Draghi, Lowe, Powell
10:30   **        USD Department of Energy Weekly Inventories

03:30   **        CHF Swiss National Bank Rate Decision
07:00   ***      GBP Bank of England Rate Decision
08:30   **        USD Weekly Jobless Claims
19:30   **        JPY Consumer Price Index, May

02:45   *          EUR French Gross Domestic Product, Q1
04:00   *          EUR Markit Eurozone Purchasing Manager Indices, June
08:30   ***      CAD Retail Sales, April
08:30   ***      CAD Consumer Price Indices, May
13:00   **        USD Baker Hughes Weekly Rig Count

Note: Asterisks indicate our preliminary estimate of the potential market impact associated with each event. One asterisk indicates an event with the lowest, two for a moderate impact, and three for the highest expected impact.

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