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Markets Today – Central Banks, UK Boosters, Lira Lows, Apple, Oil, Gold, Bitcoin

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

What a week we have in store and equity markets are off to another strong start as investors brush aside downside economic risks this winter.

Once again we’re seeing the resilience of investors in action. This week we have a plethora of central bank decisions, the highlight of which will obviously be the Fed on Wednesday, as well as a wide array of economic data and, let’s not forget, more information on the Omicron variant and the risks it poses in the coming months.

The bulk of this week’s event risk is loaded into the second half of the week but there’ll clearly be no shortage of action before then as we’re already seeing. It may just be that there’s heightened focus on Omicron and the measures leaders are taking to get to grips with it and prevent a more severe crisis in the coming weeks.

UK getting nervous about Omicron as over 30s encouraged to get booster

We’re already seeing the effect the new variant is having here in the UK, with more restrictions being imposed and the government urging people 30 and over to get the booster. Suddenly it’s a scramble to get boosted, so much so that we’re seeing long queues outside vaccinations centres and, as I’ve experienced the last 24 hours, a booking website completely incapable of handling the surge in numbers.

The economy was already facing numerous headwinds this winter and the clear concern coming from the top is only going to filter down and be a drag at an important time for many businesses. With the Prime Minister refusing to rule out further curbs before Christmas and his credibility at a low following recent leaks, who knows what the coming weeks will hold. The hope is that the late dash for the booster will be enough to save Christmas this year.

All considered it’s hardly surprising that market pricing for a rate hike from the BoE this week has plunged. The MPC was slaughtered last month for overwhelmingly voting against raising rates after misleading investors in the weeks leading up to the meeting. This time investors are clearly focused more on the rational argument for hiking, which in the current environment, there isn’t much of. February makes much more sense.

Lira plunges against ahead of CBRT on Thursday

I obviously understand why the Fed is the headline event this week but it’s the CBRT I’m most looking forward to. The central bank and government are signing from the same hymn sheet but living on a different planet from the rest of us. Inflation is above 21% and yet interest rates are expected to fall by another 100 basis points on Thursday to 14%, totaling a cut of 500 basis points since September.

A fourth intervention in the currency markets after the dollar rallied above 14 against the lira at the start of the week on the back of the S&P outlook downgrade will prove to be about as successful as the rest. The lines aren’t even blurred between government and central bank anymore, as evident in remarks by Finance Minister Nureddin Nebati on Sunday, when he claimed: “we won’t raise the interest rate”. That makes for an interesting rate decision on Thursday, but unfortunately further pain for Turkish businesses and households for many months to come.

Apple ticking all the boxes

Apple is closing in on a $3 trillion market cap in what would be another landmark moment for the company, coming a little over a year after hitting $2 trillion and three years after $1 trillion. It really is an incredible achievement and just begs the question, how long until it hits $4 trillion? They have a fantastic product lineup and so much to offer in the coming years. It’s had its doubters at times over the years, particularly on the innovation side, but it appears to be ticking all the boxes at the moment.

Oil stabilizes as we await more Omicron data

Oil prices appear to have stabilized over the last week after roaring back from their Omicron-induced losses. OPEC+ put a floor under the price for now as the group warned of sudden adjustments in output but ultimately, the price will only hold up as long as investors continue to believe Omicron poses no substantial threat. Leaders appear more concerned than investors at the moment which is always a worry, but with oil prices 15% off their October highs, there does appear to be some caution priced in at these levels.

Gold range-bound ahead of the Fed

Gold is seeing some support for a second day but remains below $1,800 and within the range it’s traded broadly within over the last few weeks. If it can break above $1,810 it may pick up some momentum to the upside but I struggle to see that ahead of the Fed decision on Wednesday. Then it’s a question of what gold bulls will want to see from the meeting. No taper acceleration? Pushback against rate hikes? Transitory being brought out of retirement? I’m not sure we’ll see any of these.

Bitcoin struggling once more

Bitcoin is back below $50,000 and really struggling to find any bullish momentum when the price does rebound. An improvement in risk appetite hasn’t even helped the cryptocurrency which could be facing a move back towards the levels seen during the flash crash earlier this month if $47,000 falls. Perhaps central banks collectively paring back tightening expectations will get the crypto community excited again this week.

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Crude Oil

Oil Prices Slip as Japan’s Rising Inflation Signals Rate Hikes

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Crude oil fell in early trading on Friday as concerns over sustained high interest rates in both Asia and the United States weighed on the outlook.

This trend is attributed to Japan’s increasing inflation, which is prompting expectations of imminent rate hikes by its central bank.

Brent crude edged declined by 11 cents to settle at $85.60 per barrel while the U.S. crude oil declined by 9 cents to $81.20 per barrel.

Recent data revealed that Japan’s core consumer prices rose by 2.5% in May compared to the same month last year. This increase marks a growth from the previous month, suggesting that the Bank of Japan is likely to raise interest rates in the upcoming months to curb inflation.

In the United States, data released on Thursday showed a decrease in the number of new unemployment claims for the week ending June 14, indicating continued strength in the job market.

This persistent robustness in employment raises the likelihood that the U.S. Federal Reserve will maintain higher interest rates for a longer period.

Higher interest rates typically have a dampening effect on economic activity, which can subsequently reduce oil demand.

The prospect of prolonged elevated interest rates in two major economies has therefore put downward pressure on crude oil prices.

Despite the downward trend, oil prices received some support from the latest figures from the Energy Information Administration (EIA).

The data showed a drawdown in U.S. crude inventories by 2.5 million barrels in the week ending June 14, bringing the total to 457.1 million barrels. This exceeded analysts’ expectations, who had predicted a 2.2 million-barrel reduction.

Also, gasoline inventories fell by 2.3 million barrels to 231.2 million barrels, contrary to forecasts that anticipated a 600,000-barrel increase.

“Gasoline finally came to life and posted its first strong report of the summer driving season,” remarked Bob Yawger, director of energy futures at Mizuho in New York, highlighting the surprising uptick in gasoline demand.

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Crude Oil

Nembe Creek Oil Field Halted After Leak, Impacting 150,000 bpd

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Nigeria’s oil output has taken a significant hit following the shutdown of the Nembe Creek oil field due to a major oil leak.

The Nembe Creek oil field, responsible for producing approximately 150,000 barrels of crude oil per day (bpd), was forced to cease operations on June 17, 2024.

The leak occurred on the Nembe Creek Trunk Line (NCTL), a critical pipeline that transports oil from the Nembe Creek oil field to the Bonny Oil Export Terminal.

The operator of the pipeline, Aiteo Eastern Exploration and Production Company, confirmed the leak and the subsequent shutdown in a statement released yesterday.

Aiteo reported that the leak was discovered during routine operations in the Nembe area of Bayelsa State, located in Nigeria’s oil-rich Delta region.

This region is notorious for environmental degradation due to decades of oil spills, which have severely impacted local agriculture and fishing industries.

Following the discovery of the leak, Aiteo activated its Oil Spill and Emergency Response Team and shut down all production from Oil Mining Lease (OML) 29 as a precautionary measure to prevent further environmental damage.

“While we regret the production losses and the potential environmental impact, our current priority is to expedite an efficient spill management process in line with regulatory standards and collaborate with all stakeholders to restore production and mitigate associated risks,” said Victor Okronkwo, Managing Director of Aiteo Eastern E&P.

The exact cause of the leak remains unknown. Aiteo emphasized that the shutdown was a precautionary step to contain the spill and minimize environmental harm.

The company has notified its joint venture partners and relevant regulatory bodies, including the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and the National Oil Spill Detection and Response Agency (NOSDRA), about the incident.

This development comes as a setback for Nigeria, which holds Africa’s largest natural gas reserves and is a major oil producer.

The country’s oil sector has faced numerous challenges, including aging infrastructure, theft, and environmental issues, which have hindered its ability to maximize production and exports.

The Nembe Creek shutdown also highlights ongoing concerns about the safety and reliability of Nigeria’s oil infrastructure. The NCTL has been a frequent target of oil theft and sabotage, exacerbating the challenges of maintaining a steady oil output.

Energy analysts believe that the latest incident could impact Nigeria’s ability to meet its export commitments and exacerbate the country’s economic challenges.

The Nigerian government, under President Bola Tinubu, has been making efforts to attract investment into the energy sector to boost production and address infrastructure deficits.

“The government will hope this offers confidence not only in the quality of the Nigerian resource base, but also in the government’s pledge to improve ease of doing business,” said Clementine Wallop, director of sub-Saharan Africa at political risk consultancy Horizon Engage.

As Nigeria works to address the immediate spill and restore production, the broader implications for the country’s oil sector and its environmental impact remain to be seen.

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Brent Crude Nears Seven-Week Highs as Market Eyes US Inventory Report

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Brent oil, the international benchmark for Nigerian crude oil, remained steady on Thursday, hovering just below seven-week highs as the escalating conflict in the Middle East raised concerns over potential supply disruptions.

At the same time, the market eagerly awaits U.S. inventory data for further indications of demand trends.

August Brent crude rose 28 cents, or 0.3%, to $85.35 a barrel while the U.S West Texas Intermediate (WTI) oil gained 13 cents, or 0.2%, to $81.70 a barrel.

“There was no WTI settlement on Wednesday due to a U.S. public holiday, which kept trading subdued,” noted Ricardo Evangelista, an analyst at ActivTrades.

“However, oil prices are likely to remain supported around current levels due to a growing geopolitical risk premium driven by conflict in the Middle East.”

Israeli forces have intensified their operations in the Gaza Strip, targeting areas in the central region overnight while tanks advanced into Rafah in the south.

The escalating violence has heightened fears of a broader conflict that could impact oil supplies from the region.

“Expectations of an inventory build appear to be overshadowing fears of escalating geopolitical stress for now,” said Priyanka Sachdeva, senior market analyst at Phillip Nova.

Investors are keenly awaiting the release of U.S. inventory data from the Energy Information Administration (EIA) later on Thursday, delayed by a day due to the Juneteenth holiday.

An industry report released on Tuesday by the American Petroleum Institute (API) indicated that U.S. crude stocks rose by 2.264 million barrels in the week ending June 14, while gasoline inventories fell, according to market sources.

The summer season typically sees an uptick in oil demand due to increased refinery runs and weather-related risks.

“Ongoing production cuts by the OPEC+ group, combined with seasonal demand, should tighten oil balances and lead to inventory draws during the summer months,” J.P. Morgan commodities analysts wrote.

Refining margins have also improved, with the ICE gasoil futures premium to Brent crude jumping to $20.63 a barrel on Wednesday, a two-month high.

“Firmer fuel refining margins provide a healthy dose of encouragement for those expecting improvements on the demand side,” commented Tamas Varga, an analyst at PVM.

In other economic news, the Bank of England’s decision to keep its main interest rate unchanged at a 16-year high of 5.25% ahead of the national election on July 4 has been noted by market observers.

Higher interest rates generally increase the cost of borrowing, which can slow economic activity and dampen oil demand.

As the market braces for the upcoming EIA inventory report, analysts and traders are closely watching for any signals that could influence oil prices in the near term.

The delicate balance between geopolitical tensions and supply-demand fundamentals continues to play a critical role in shaping the oil market landscape.

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