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Equity markets are little changed following the best week since March as the S&P 500 Index reaches its highest level since August of last year. While OPEC + kept production stagnant over the weekend, an independent production cut from Saudi Arabia sent bond yields higher as oil prices jumped in early trading. At 10:00 am eastern time, however, weak economic data from the United States proved increasingly influential amidst Saudi Arabian muscle, reversing bond yields into the red while paring gains for crude oil.<\/p>\n\n\n\n
After an OPEC + cartel pledge to cut oil production by approximately 3.6 million barrels a day failed to adequately boost oil prices, Saudi Arabia announced yesterday plans to cut an additional 1 million barrels a day. The country made the unilateral decision after OPEC+ countries that collectively account for half the world\u2019s oil supply failed to approve additional cartel-wide production limits but agreed to continue honoring previously announced cuts. The new Saudi cuts are scheduled to kick in during July, which is the peak of the U.S. summer traveling season. In October, OPEC + announced cutting production by 2 million barrels a day and then in April it added another 1.6 million barrels a day to the production limit. Since October, however, oil prices for WTI crude have dropped approximately 20%.<\/p>\n\n\n\n
Meanwhile, U.S. domestic oil producers that are under pressure to return capital to shareholders are also demonstrating production discipline. The U.S. oil and gas rig count plummeted by 44 during May, ending the month at 711, the lowest count since May of last year, according to Baker Hughes. While production cuts express oil executives\u2019 concerns that weakening economic growth will hurt demand for oil, a new survey by the Dallas Federal Reserve Bank conducted from March 15 to March 23 illustrates that the energy industry faces additional headwinds. In the survey, 30% of energy executives said cost inflation is the biggest challenge to profitability while another 30% said the health of the global economy is challenging profits. Executives were also asked to identify prices at which drilling new wells is profitable within regions in which each company is the most active. The price ranged from $56 a barrel in the Eagles Ford basin in Texas to $66 a barrel in the portion of the Texas Permian basin called the Delaware section. On a positive note, only 3% of respondents identified supply chain issues as an impediment to profits.<\/p>\n\n\n\n
While OPEC + and domestic U.S. producers are curtailing production, the deployment of alternative energy is growing at a record pace, according to the International Energy Agency. The Europe energy crisis associated with the Russian invasion of Ukraine, the Inflation Reduction Act in the U.S. and the rapid expansion of clean energy in China is expected to result in 440 gigawatts of deployment this year, up from a staggering 333 gigawatts from last year. <\/p>\n\n\n\n
Today\u2019s ISM Services data release served to cool WTI crude oil prices, which declined from a daily high of $75 per barrel to $72.06. Data came in well below expectations, with the 50.3 headline reading falling short of the 52.2 consensus expectation. May\u2019s data also came in much cooler than April\u2019s 51.9 and inched close to contraction territory, which lies below 50. May\u2019s expansion, however, was the fifth consecutive month of growth. The greatest headwind to the headline came from employment, which experienced a mixed Jobs Report last week. Friday\u2019s report was characterized by a growth in payroll employment but a contraction in the household survey and an accompanying 30-basis point (bp) increase in the unemployment rate. Employment in ISM services registered a reading of 49.2, while prices paid remained high at 56.2, with both slowing from April\u2019s 50.8 and 59.6 readings. While demand for labor is slowing dramatically in some data sets, inflationary pressures are maintaining their momentum. Also, out at 10:00 am eastern time and pushing yields lower, April Factory Orders grew 0.4%, well below expectations calling for 0.8% and from March\u2019s 0.6% growth.<\/p>\n\n\n\n