by Bill O’Grady and Kaisa Stucke

[Posted: 9:30 AM EDT] Crude prices rebounded yesterday and are up again overnight.  Kuwait announced its plans to expand production back to normal levels despite the worker strike over public sector pay.  Kuwaiti officials indicated that some workers have returned to their positions and that the current inventory levels of petroleum derivatives can keep production at a normal level for a month.

Additionally, there’s speculation that Saudi Arabia may increase production in response to Iran’s refusal to agree to a production cut in Doha.  Saudi Arabia insisted that a production freeze is possible only if all OPEC producers, including Iran, participate.  Since the beginning of the year, Saudi Arabia has modestly cut its production, while Iran has increased more than 10%.  The risk of a market share war has increased as Saudi Arabian Prince Mohammed bin Salman indicated that the country currently has roughly another 1 million barrels per day of spare capacity (accounting for about 10% of current production), which the country is ready to use “if there is anyone that decides to raise their production.”  It is likely that this statement is a warning aimed at Iran, rather than a statement of current intent.

Last night, Boston FRB President Rosengren, a voter this year on the FOMC, indicated that he belives market expectations for rate hikes are too dovish and that the Fed is likely to tighten faster than the market expects.  Currently, the futures market is signaling expectations of a single quarter-point hike in rates over the next year.  This is the second time in two weeks that Rosengren has delivered a similar message and markets generally ignored the warning, with risk markets trending higher.  The FOMC is scheduled to meet next week, but this meeting does not have a press conference scheduled with it, thus market expectations for a rate hike are near zero.

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