The OPEC secretariat have been quick to quash a media report on the cartel considering another whopping increase in supply of half a million barrels of oil as of November. While conspiracy can stalk so much of market thinking, one does wonder if this is just repetition on how ‘sources’ leak to the media of an impending output hike to measure reaction, the latter denial being ancillary and only useful if there is an overtly negative reaction. Judging by the muted market move to an increase of some four-fold over the 137kbpd due back in October, we should not be surprised if the acceleration of production return becomes real. What comes as a softening of a potentially very bearish blow, is how OPEC+ is failing to make existing production targets. Reuters analysis last week offered that between April and August, OPEC+ delivered only 75% of production increases, almost 500kbpd below the targeted increase of 1.92mbpd for that period. The complicated issues around Russia’s diminished ability to export and the Damoclean threat of further sanctions is also acting as an emergency brake. Yet, there is some logic involved in OPEC pressing on the pedal of production. It may not yet have the ability to hit its full production potential, but if the name of the new game is to reclaim market share, then it must show customers, new and old, it will cater for their oil needs with consistency, free from infighting and endeavours to manipulate price by supply. It is patently obvious on the biggest importing area of all, Asia, being more than ready to seek unencumbered deliveries be they from Africa or the Americas, and if the consequence of a full-pumping OPEC and OPEC+ is a period of lower oil prices to sate the area’s needs, it looks as if the cartel’s members are preparing for it.

Artificial or Intelligent over-exuberance

The mind of a stock market investor is a curious thing. It is one of incredible resilience and quite extraordinary silver-lining optimism. Faced with those in charge of scraping together a federal budget in full-blown partisan chest puffing, the barbs and feints from Capitol Hill act more as an irritant to the deep-veined bulls and not even the very grown-up conversations around the US national deficit of $37 trillion can curb their enthusiasm.  

The tolerance to debt is seen in how little reaction came forth from the International Monetary Fund’s report on global debt. The world’s total debt remains at 235 percent of global GDP being $251 trillion. The report highlighted how private debt declined to under 143 percent of GDP, the lowest level since 2015, reflecting a reduction in household liabilities and little change in non-financial corporate debt. In contrast, public debt on a global basis rose to nearly 93 percent of GDP with the major economies of the world all flushing their monetary systems with stimulus-like monies. Now, while a debt-crisis is probably not on the cards, those in charge will just borrow more, it must be at least considered, some of the increases in ratios can only make for a harder sale when governments are trying to entice buyers of their bonds. Germany has always been fiscally prudent, but the spending spree promised by its new Chancellor, Friedrich Merz, running to €500 billion will soon accelerate its current public GDP to debt of 65%. However, the rest of the (public) ratios for G7 countries make for alarming reading. Japan is unlikely to ever be overtaken as the champion with 235%, but all others are above 100%; Canada being 110%, UK 105%, France 115%, Italy 135% and importantly the US 123%, but likely higher when it is measured at the year’s end. Billowing debt requires continued uptake of bonds that are sustainable in yields, but more importantly the fate of interest rates and indeed the reliability of an incumbent government. 

There is a circular frothing up on some of the major contributors of the technology industry rally by, amazingly, tech industry names themselves. This is observed by the decision from the darling of all, Nvidia, to invest $100 billion, yes billion, in OpenAI. To give the mammoth sum some sort of oil perspective, BP’s market capitalisation stands at £70 billion, a near US Dollar equivalent if one adopts the modern view that a few billion here and there hardly matters. To stress the point, the giant US refiner and driller Phillips 66 is ‘only’ worth $56 billion. Hone the perspective even more and quick internet search will show how OpenAI is worth $500 billion, therefore the Nvidia investment is 20 percent of one of its chip buying customers’ corporate value. 

None of us here feel remotely qualified to call AI a ‘bubble’ and it being about to burst, new inventions probably require new thinking. However, it is always worth pointing out the dangers of herd-like mentality which is financed and sponsored by a singularity. In the US, the Russell 2000 index, which plots the health of small-cap companies has also risen to all-time-highs. The move higher is indeed an effect of the recent Fed rate cut and possible easing in the infamous ‘dot plot’, as external funding is relied upon for investment and growth. However, given the price-to-earnings ratio is generally lower than the eye-watering valuations seen in the S&P and Nasdaq, there is an element of a safety shift going on. Sensible trading as that all seems, it also corroborates with an optimistic mood, and the thermals keep lifting investment profits, and so the beast is fed. 

A commodity mind will always seek the fundamental reason for strength. Just because the likes of Nvidia are not physically seen to be consuming in a traditional sense, they certainly are in places that cannot be seen. Data centres, software platforms and AI development are the new tangibles which have captured the greatest market mover of all, sentiment. But a crowded trade, is a crowded trade and although it is hard to level the accusation of the stock market being a one-trick pony, the exuberance is now starting to wander beyond the realms of justification. Interest rates in the US are stubborn, so is inflation and the job market is softening. Gold is not knocking on the door of $4000/ounce because everyone wants to start wearing gaudy baubles, it is where it is because of it being deemed as a ‘safe’ haven. ‘Crash’ is an ugly word, ‘correction’ is more formative. Debt, over-egged valuations, interest rates and a nasty turn in world trade relations will not be able to be ignored for much longer. Ironically, it will be the AI led trading models that will determine how far a ‘correction’ might skittle the markets. Even then, technology is not done with, nor are stock market bulls and after any reset, as the most famous AI-built robot ever said in a film, “I’ll be back.”

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