Markets

Stocks Lower After US Data, Patient RBA, GBP Testing 1.35 Ahead of BOE, Awaiting OPEC+ Decision, Exxon Investing in New Wells, Gold Rallies Above $1800, Bitcoin Hovers

Published

2 years ago

February 1, 2022

By Edward Moya, Senior Market Analyst, UK & EMEA, OANDA

US stocks are getting pulled all over the place as investors digest both a wrath of economic data and a chorus of Fed speak that has de-escalated aggressive tightening fears for now. Impressive earnings from UPS and Exxon helped risk appetite early but that faded quickly as traders remain fixated over everything about inflation. For about 10-minutes much of Wall Street took a break to hear the news that Tom Brady announced his retirement.

Equities extended their declines after the ISM manufacturing report and JOLTS data showed inflationary pressures intensified. The ISM, JOLTs, and construction data all support the economy is in a good place, except for the 800-pound inflation gorilla in the room. The ISM prices paid index soared to from 68.2 to 76.1 and the JOLTS data showed the labor market remains super tight as job openings rose to 10.93 million, much higher than the consensus estimate of 10.3 million. Pricing pressures are still ascending at a pace that should concern the Fed and wage pressures are only going to get hotter as the number of job openings increase.

Before the US economic data, a lot of traders were thinking it is time to forget about a half-point rate hike in March, unless inflation gets significantly hotter. Wall Street was starting to lean towards a 25-basis point increase in March, but that won’t remain the base case if wage pressures and prices paid continue to soar. For risk appetite to reassert itself, investors need to be convinced that the Fed will not become too aggressive in tightening policy.

RBA

The Reserve Bank of Australia (RBA) kept rates steady and decided to discontinue its bond buying program this month. The Australian dollar initially declined over the dovish surprise as the central bank decided to take a patient stance with inflation, noting they will continue to monitor it and showed no urgency to deliver rate hikes. The bank made it clear that ending QE does not mean rate increases are imminent.

BOE

The Bank of England is expected to deliver another rate increase, this time lifting rates by 25 basis points to 0.50% and signal that more are coming. The BOE has telegraphed that they will reduce the size of the balance sheet once interest rates are back to the 0.50% level. The ending of bond reinvestments would mean that £25 billion of gilts would not be bought this fiscal year. The bank is getting closer to selling bonds, but that might not happen until the summer.

Oil/Exxon

Crude prices edged lower ahead of the OPEC+ meeting on output and after Exxon’s quarterly update showed the oil giant was ready to significantly increase its investment in new wells. Fears of an OPEC+ surprise has many energy traders locked in profits. OPEC+ is expected to stick to the script and deliver a 400,000 bpd increase next month and when you factor in that many members are struggling to hit their quotas, oil seems poised to head higher. Fears of disruption to supplies will remain elevated given the winter blast hitting the north and the geopolitical risks abroad.

WTI crude seems poised to resume its bullish trend as long as the Saudis don’t pull a surprise at the OPEC+ meeting and make a push for a larger increase over output. The Saudis are seeing US drillers are beginning to invest in new wells and that could trigger some market share fears.

Exxon delivered impressive results as revenue surged over 80% year over year and profit posted the best gain since 2014. The oil giant is going to have a strong year as they continue to focus on cost cutting and buying back shares, while benefiting from a new lower breakeven oil price fell to $41 a barrel. Exxon is boosting its spending on new wells by as much as 45%. The company narrowed its capital expenditure guidance for the year, which still supports a significant investment in new wells.

Gold

Gold is bouncing back as expectations for aggressive global central bank tightening eased after the RBA showed they are in no rush to raise rates and as some traders doubt the Fed will kickoff tightening with a half-point increase. The Fed’s Harker signaled that he currently supports the idea of four 25 basis point increases this year and is not convinced they should start with a 50 bps increase in March.

Gold also got a boost on fears that nonfarm payrolls would have a big miss after White House press secretary Psaki said around 9 million people called out sick in early January.

Gold fell to session lows after the ISM and JOLTS data sparked inflationary fears, sending the 10-year Treasury yield back above 1.80%. Gold is hovering around $1800 but if selling pressure returns, it could get ugly quick as momentum sellers are watching.

Bitcoin

Bitcoin will continue to trade like a risky asset and most likely benefit if central banks continue to show some hesitancy in turning very aggressive with tightening monetary policy. The BOE and ECB rate decisions might have a larger impact on cryptos than normal as Wall Street is looking for a cue on which direction risk appetite is headed. A lot of January data in the US is expected to be soft and that should continue to support the Fed’s growing chorus of members that want an interest rate increase cycle that does not disrupt the economy.

Bitcoin should continue to stabilize here but if it breaks $40,000, that would surprise many traders and could see some bullish momentum.

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Crude Oil

Oil Prices Recover Slightly Amidst Demand Concerns in U.S. and China

Published

4 days ago

December 7, 2023

Investors King

Oil prices showed signs of recovery on Thursday after a recent slump to a six-month low, with Brent crude oil appreciating by 1% to $75.06 a barrel while the U.S. West Texas Intermediate crude oil also rose by 1% to $70.05 a barrel.

However, investor concerns persist over sluggish demand in both the United States and China.

The market’s unease was triggered by data indicating that U.S. oil output remains close to record highs despite falling inventories.

U.S. gasoline stocks rose unexpectedly by 5.4 million barrels to 223.6 million barrels, adding to the apprehension.

China, the world’s largest oil importer, also contributed to market jitters as crude oil imports in November dropped by 9% from the previous year.

High inventory levels, weak economic indicators, and reduced orders from independent refiners were cited as factors weakening demand.

Moody’s recent warnings on credit downgrades for Hong Kong, Macau, Chinese state-owned firms, and banks further fueled concerns about China’s economic stability.

Oil prices have experienced a 10% decline since OPEC+ announced voluntary output cuts of 2.2 million barrels per day for the first quarter of the next year.

In response to falling prices, OPEC+ member Algeria stated that it would consider extending or deepening oil supply cuts.

Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman met to discuss further oil price cooperation, potentially boosting market confidence in the effectiveness of output cuts.

Russia, part of OPEC+, pledged increased transparency regarding fuel refining and exports, addressing concerns about undisclosed fuel shipments.

Crude Oil

Oil Prices Continue Slide as Market Skepticism Grows Over OPEC+ Cuts

Published

4 days ago

December 6, 2023

Investors King

Global oil markets witnessed a continued decline on Wednesday as investors assessed the impact of extended OPEC+ cuts against a backdrop of diminishing demand prospects in China.

Brent crude oil, the international benchmark for Nigerian crude oil, declined by 63 cents to $76.57 a barrel while U.S. WTI crude oil lost 58 cents to $71.74 a barrel.

Last week, the Organization of the Petroleum Exporting Countries and its allies, collectively known as OPEC+, agreed to maintain voluntary output cuts of approximately 2.2 million barrels per day through the first quarter of 2024.

Despite this effort to tighten supply, market sentiment remains unresponsive.

“The decision to further reduce output from January failed to stimulate the market, and the recent, seemingly coordinated, assurances from Saudi Arabia and Russia to extend the constraints beyond 1Q 2024 or even deepen the cuts if needed have also fallen to deaf ears,” noted PVM analyst Tamas Varga.

Adding to the unease, Saudi Arabia’s decision to cut its official selling price (OSP) for flagship Arab Light to Asia in January for the first time in seven months raises concerns about the struggling demand for oil.

Amid the market turmoil, concerns over China’s economic health cast a shadow, potentially limiting fuel demand in the world’s second-largest oil consumer.

Moody’s recent decision to lower China’s A1 rating outlook from stable to negative further contributes to the apprehension.

Analysts will closely watch China’s preliminary trade data, including crude oil import figures, set to be released on Thursday.

The outcome will provide insights into the trajectory of China’s refinery runs, with expectations leaning towards a decline in November.

Russian President Vladimir Putin’s diplomatic visit to the United Arab Emirates and Saudi Arabia has added an extra layer of complexity to the oil market dynamics.

Discussions centered around the cooperation between Russia, the UAE, and OPEC+ in major oil and gas projects, highlighting the intricate geopolitical factors influencing oil prices.

Crude Oil

U.S. Crude Production Hits Another Record, Posing Challenges for OPEC

Published

5 days ago

December 5, 2023

Investors King

U.S. crude oil production reached a new record in September, surging by 224,000 barrels per day to 13.24 million barrels per day.

The U.S. Energy Information Administration reported a consecutive monthly increase, adding 342,000 barrels per day over the previous three months, marking an annualized growth rate of 11%.

The surge in domestic production has led to a buildup of crude inventories and a softening of prices, challenging OPEC⁺ efforts to stabilize the market.

Despite a decrease in the number of active drilling rigs over the past year, U.S. production continues to rise.

This growth is attributed to enhanced drilling efficiency, with producers focusing on promising sites and drilling longer horizontal well sections to maximize contact with oil-bearing rock.

While OPEC⁺ production cuts have stabilized prices at relatively high levels, U.S. producers are benefiting from this stability.

The current strategy seems to embrace non-OPEC non-shale (NONS) producers, similar to how North Sea producers did in the 1980s.

Saudi Arabia, along with its OPEC⁺ partners, is resuming its role as a swing producer, balancing the market by adjusting its output.

Despite OPEC’s inability to formally collaborate with U.S. shale producers due to antitrust laws, efforts are made to include other NONS producers like Brazil in the coordination system.

This outreach aligns with the historical pattern of embracing rival producers to maintain control over a significant share of global production.

In contrast, U.S. gas production hit a seasonal record high in September, reaching 3,126 billion cubic feet.

However, unlike crude, there are signs that gas production growth is slowing due to very low prices and the absence of a swing producer.

Gas production increased by only 1.8% in September 2023 compared to the same month the previous year.

While the gas market is in the process of rebalancing, excess inventories may persist, keeping prices low.

The impact of a strengthening El Niño in the central and eastern Pacific Ocean could further influence temperatures and reduce nationwide heating demand, impacting gas prices in the coming months.