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Market Buzz | Summer 2018

Notes on Recent Economic Developments
Market Buzz

Oil prices soar on OPEC production promise 

A boost in oil production lifted U.S. oil prices by the largest one-day increase since November 2016 after the Organization of the Petroleum Exporting Countries, OPEC, tentatively agreed to produce about 600,000 more barrels of crude oil a day, The Wall Street Journal reported in its June 23 weekend edition.

The agreement awaits final sign off from Russia, which had wanted to boost production more significantly to sell more oil at higher prices, and its non-OPEC partners.

Nearly two years ago, OPEC members had agreed to reduce oil output by 2 percent, or about 1.8 million barrels a day, the first such reduction in eight years. That move successfully curbed excess inventory of oil stockpiled in developed nations and boosted oil prices.

With U.S. oil inventories depleting steadily, the market reacted to the boost-in-output plans with prices that surged 4.6 percent to $68.58 a barrel. 

“The market was drawing inventories, we had seen a tight balance, and OPEC needed to increase supplies to address it,” Greg Sharenow, portfolio manager at Pacific Investment Management Co., told The Wall Street Journal. “Now the concern in the market will pivot to, ‘Where is the excess capacity in the system?’ ”

Before the current agreement, oil prices had been rising against the backdrop of an improving global economic picture and unanticipated inventory decline, sparking complaints from the U.S. and other oil-hungry nations. President Donald J. Trump had blamed OPEC in a tweet and complained about the high prices.

“The OPEC decision was a big uncertainty,” Adam Rozencwajg, managing partner at Goehring & Rozencwajg Associates, told The Wall Street Journal. “Now that it is behind us, the bullish supply and demand fundamentals can once again come to the fore.”

Banks reward customers with cash instead of higher interest rates

Instead of wooing prospective customers with higher interest rates in the wake of seven Federal Reserve interest-rate increases since 2015, banks are rewarding new depositors with cash in efforts to stave off deposit declines, The Wall Street Journal reported in its June 23 weekend edition.

Banks are vying for deposits with these cash bonuses, one-time payments of hundreds of dollars when someone opens a new account. The invigorated rewards average about $300 at regional lenders, up from less than about $200. 

At large national and regional banks the bonuses typically range from $150-$500, which is likely more beneficial to customers with smaller accounts than those with higher balances.

Matt Jauchius, chief marketing officer at Cincinnati-based Fifth Third Bankcorp, told the newspaper that the bonuses are “the modern version of a toaster.”

In the past, banks typically increased the rate paid to their checking and savings account customers when the Fed raised interest rates. Now, however, banks have passed along only 18 percent of the benefit from higher rates, Erika Najarian, a bank analyst at Bank of America Corp., told The Wall Street Journal.

Competition stiffened for new depositors when the central bank raised its benchmark interest rate by about 1.75 percentage points, sending some depositors to seek money-market funds that earn higher yields.

Fresh deposits are integral to the banking business, as banks depend on customer deposits to make loans to others. Reduced deposits can cause banks to curb lending or turn to more expensive funding.

— Compiled by Jean Williams