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An Action-Packed Few Days

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Traders Wall Street

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

Caution is once again evident in equity markets on Wednesday as we await the final Fed rate decision of the year.

Once again we find ourselves in an environment in which investors have perhaps got carried away with some early promising reports on the severity of the omicron variant and have not fully appreciated the downside economic risks facing the global economy.

Central banks have little choice but to start tightening monetary policy in the majority of cases, as inflation continues to rise to uncomfortable levels, become more widespread, and show signs of becoming more permanent. Omicron posing a greater threat and forcing restrictions may delay the inevitable but not for long as policymakers can’t afford to be complacent.

The Fed is not likely to hesitate following its meeting today and is widely expected to accelerate the tapering of its asset purchases, allowing for rate hikes to start in the second quarter. It could be argued that it’s taken longer than it should have but policymakers are finally coming around to the markets way of thinking and rate hikes are not far away.

The retail sales data for November won’t deter the Fed, with consumer spending more broadly remaining strong and the data perhaps signalling that purchases were brought forward as a result of supply concerns. The consumer remains in a strong position going into the new year and today’s report won’t be a cause for concern.

UK inflation hits decade high ahead of BoE meeting

The UK data this week highlights exactly why policymakers are being forced to withdraw stimulus earlier than they’d like and at a time of significant uncertainty around the variant. Not only are inflationary pressures accelerating faster than they anticipated and becoming more widespread, but an ever-tightening labour market is chipping away at the argument that it’s only temporary.

Odds on the Bank of England to raise rates tomorrow have increased following the data this week, although the consensus view remains that it will refrain due to the significant amount of uncertainty that omicron is creating as restrictions are reimposed. By February, the MPC will have much more data to hand and the booster program will have had time to improve the nation’s resistance to the virus. It certainly won’t be easy, but it may be sensible for policymakers to turn a blind eye to decade-high inflation this week.

Oil eases but OPEC+ could strike at any point

Oil prices are continuing to pare post-OPEC+ gains ahead of the Fed meeting. Ongoing reports of omicron-driven restrictions, combined with disappointing data from China which casts doubt over its growth potential are weighing on crude prices as we head into a highly uncertain period for the global economy.

The IEA also reported that the oil market has returned to surplus and that inventories will swell early next year, with first-quarter demand seen dropping by 600,000 barrels per day. It’s hard not to see this as a political victory for Joe Biden and the Democrats ahead of the midterms, given the timing of their coordinated SPR release. He’ll end up getting a lot of credit, despite the bulk of the price decline being omicron-related.

That said, it just takes OPEC+ to follow through on the immediate adjustment threat for prices to rise once again which will keep oil sellers on edge. This may limit the downside for now, although markets do like to eventually test the resolve of these warnings eventually.

Gold vulnerable to hawkish Fed

Gold is relatively flat on the day ahead of the all-important Fed decision. The yellow metal has been range-bound for weeks as every other asset class has whipsawed all over the place, while traders get to grips with the new variant. The Fed will have a huge role to play in how gold trades into year-end, starting today.

The central bank can’t afford to be complacent and isn’t expected to be. A policy mistake on that front could be bullish for gold as investors will be forced to factor in higher inflation which certainly improves to appeal of the yellow metal. If policymakers accelerate tapering, as expected, and price in two or three hikes for next year, we could see gold really test the lows of the last couple of months.

Santa rally for bitcoin?

Bitcoin has also been relatively steady recently, albeit with a slight bearish bias as it struggles to generate any momentum above $50,000. It slipped below $47,000 earlier this week but quickly found its feet again and, despite being above here once more, is off a little today. Perhaps there is an eye on the Fed meeting here as well, with the crypto-crowd hoping for a continuation of inflationary loose policy, which they’ve long believed is bullish for the cryptocurrency.  I guess we’ll soon see if bitcoin can look forward to a Santa rally of its own.

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Crude Oil

Oil Prices Continue to Slide: Drops Over 1% Amid Surging U.S. Stockpiles

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Crude Oil

Amidst growing concerns over surging U.S. stockpiles and indications of static output policies from major oil-producing nations, oil prices declined for a second consecutive day by 1% on Wednesday.

Brent crude oil, against which the Nigerian oil price is measured, shed 97 cents or 1.12% to $85.28 per barrel.

Similarly, U.S. West Texas Intermediate (WTI) crude slumped by 93 cents or a 1.14% fall to close at $80.69.

The recent downtrend in oil prices comes after they reached their highest level since October last week.

However, ongoing concerns regarding burgeoning U.S. crude inventories and uncertainties surrounding potential inaction by the OPEC+ group in their forthcoming technical meeting have exacerbated the downward momentum.

Market analysts attribute the decline to expectations of minimal adjustments to oil output policies by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known collectively as OPEC+, until a full ministerial meeting scheduled for June.

In addition to concerns about excess supply, the market’s attention is also focused on the impending release of official government data on U.S. crude inventories, scheduled for Wednesday at 10:30 a.m. EDT (1430 GMT).

Analysts are keenly observing OPEC members for any signals of deviation from their production quotas, suggesting further volatility may lie ahead in the oil market.

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Energy

Nigeria Targets $5bn Investments in Oil and Gas Sector, Says Government

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Crude Oil - Investors King

Nigeria is setting its sights on attracting $5 billion worth of investments in its oil and gas sector, according to statements made by government officials during an oil and gas sector retreat in Abuja.

During the retreat organized by the Federal Ministry of Petroleum Resources, Minister of State for Petroleum Resources (Oil), Heineken Lokpobiri, explained the importance of ramping up crude oil production and creating an environment conducive to attracting investments.

He highlighted the need to work closely with agencies like the Nigerian National Petroleum Company Limited (NNPCL) to achieve these goals.

Lokpobiri acknowledged the challenges posed by issues such as insecurity and pipeline vandalism but expressed confidence in the government’s ability to tackle them effectively.

He stressed the necessity of a globally competitive regulatory framework to encourage investment in the sector.

The minister’s remarks were echoed by Mele Kyari, the Group Chief Executive Officer of NNPCL, who spoke at the 2024 Strategic Women in Energy, Oil, and Gas Leadership Summit.

Kyari stressed the critical role of energy in driving economic growth and development and explained that Nigeria still faces challenges in providing stable electricity to its citizens.

Kyari outlined NNPCL’s vision for the future, which includes increasing crude oil production, expanding refining capacity, and growing the company’s retail network.

He highlighted the importance of leveraging Nigeria’s vast gas resources and optimizing dividend payouts to shareholders.

Overall, the government’s commitment to attracting $5 billion in investments reflects its determination to revitalize the oil and gas sector and drive economic growth in Nigeria.

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Commodities

Palm Oil Rebounds on Upbeat Malaysian Exports Amid Indonesian Supply Concerns

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Palm Oil - Investors King

Palm oil prices rebounded from a two-day decline on reports that Malaysian exports will be robust this month despite concerns over potential supply disruptions from Indonesia, the world’s largest palm oil exporter.

The market saw a significant surge as Malaysian export figures for the current month painted a promising picture.

Senior trader David Ng from IcebergX Sdn. in Kuala Lumpur attributed the morning’s gains to Malaysia’s strong export performance, with shipments climbing by a notable 14% during March 1-25 compared to the previous month.

Increased demand from key regions like Africa, India, and the Middle East contributed to this impressive growth, as reported by Intertek Testing Services.

However, amidst this positivity, investors are closely monitoring developments in Indonesia. The Indonesian government’s contemplation of revising its domestic market obligation policy, potentially linking it to production rather than exports, has stirred market concerns.

Edy Priyono, a deputy at the presidential staff office in Jakarta, indicated that this proposed shift aims to mitigate vulnerability to fluctuations in export demand.

Yet, it could potentially constrain supply availability from Indonesia in the future to stabilize domestic prices.

This uncertainty surrounding Indonesian policies has added a layer of complexity to palm oil market dynamics, prompting investors to react cautiously despite Malaysia’s promising export performance.

The prospect of Indonesian supply disruptions underscores the delicacy of global palm oil supply chains and their susceptibility to geopolitical and regulatory factors.

As the market navigates these developments, stakeholders remain attentive to both export data from Malaysia and policy shifts in Indonesia, recognizing their significant impact on palm oil prices and market stability.

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