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Treading Water

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

Markets are treading water ahead of the release of the first jobs report of the new year, with investors very aware of just how important this could be after last month’s setback.

The November report contained everything the Federal Reserve did not want to see. Strong jobs growth – with upward revisions to prior releases – much higher wages than anticipated and weaker participation. If that’s a blip in the trend, it’s no big deal. But a second consecutive month would deliver a sledgehammer to hopes of a lower terminal rate.

The Fed has remained extremely hawkish throughout all of this, through fear of feeding investors’ craving for a dovish pivot and unintentionally easing financial conditions. But another strong jobs report today would further justify such a hawkish approach and perhaps send risk assets into a bit of a tailspin as the prospect of a higher terminal rate increases alongside recession risks.

We don’t often put so much weight on one report but last month was a big setback and a second would make it very difficult to argue that the trend is still positive. Headline inflation will probably decline this year due to favourable base effects and lower energy prices but the Fed has for a long time now been much more fearful of entrenched inflation which is why there’s so much focus on the tightness of the labour market and wages. They’re unlikely to stop hiking soon unless there’s progress here.

ECB to be unfazed by inflation data

Eurozone inflation fell to 9.2%, well below the 9.6% expected and a big decline from November’s 10.1% reading. Policymakers at the ECB will not be in a celebratory mood though for a number of reasons. The most obvious is that it’s still way too high, almost five times its target.

The second is that it’s primarily driven by declines in energy prices which while helpful doesn’t solve the inflation problem. And finally, core inflation actually rose to 5.2% from 5% which proves there’s still work to be done. While the euro was choppy after the release, the consensus view appears to be that today’s data changes nothing and another 1% of rate hikes will come over the next couple of meetings.

Steadying after a rough week

Oil prices are creeping higher again this morning after steadying on Thursday. They came under some pressure over the previous 48 hours amid concerns about China’s economy over the next quarter or two. A lack of trustworthy data doesn’t help that situation but with Covid spreading so rapidly throughout the country, it’s likely there’s going to be disruption at the very least that will hamper economic activity and demand.

That will likely change in the second half of the year and the economic rebound could fuel more demand for crude and see prices rise once more. The state of the rest of the global economy by that point will determine just how supportive that would be for the price, among other things of course like Russian output and OPEC+ as a whole.

Strong jobs report could be a big blow

Gold pared gains on Thursday before steadying today ahead of the US jobs report. It remains very elevated after a strong start to the year and some weakness on wages and job growth could spark the rally back to life once more.

Of course, another strong jobs report could see its fortune shift the other way and push it back into a corrective phase after a strong recovery since early November. It appeared to be gearing up for a correction late last year but lower yields this week have given it a new lease of life. That could be quickly undone by another strong report.

Into the shadows

Bitcoin remains rangebound between $16,000 and $17,000 where it has spent much of the last month. The jobs report today may bring it back to life a little but in reality, crypto fans are probably happy to see it steadying and drifting into the background as the industry recovers from the trauma of the FTX collapse. It’s weak and vulnerable at the minute and any more shocks could be extremely damaging.

Crude Oil

Crude Oil Dips Slightly on Friday Amid Demand Concerns

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Crude oil gains

On Friday, global crude oil prices experienced a slight dip, primarily attributed to mounting concerns surrounding demand despite signs of a tightening market.

Brent crude prices edged lower, nearing $83 per barrel, following a recent uptick of 1.6% over two consecutive sessions.

Similarly, West Texas Intermediate (WTI) crude hovered around $78 per barrel. Despite the dip, market indicators suggest a relatively robust market, with US crude inventories expanding less than anticipated in the previous week.

The oil market finds itself amidst a complex dynamic, balancing optimistic signals such as reduced OPEC+ output and heightened tensions in the Middle East against persistent worries about Chinese demand, particularly as the nation grapples with economic challenges.

This delicate equilibrium has led oil futures to mirror the oscillations of broader stock markets, underscoring the interconnectedness of global economic factors.

Analysts, including Michael Tran from RBC Capital Markets LLC, highlight the recurring theme of robust oil demand juxtaposed with concerning Chinese macroeconomic data, contributing to market volatility.

Also, recent attacks on commercial shipping in the Red Sea by Houthi militants have added a risk premium to oil futures, reflecting geopolitical uncertainties beyond immediate demand-supply dynamics.

While US crude inventories saw a slight rise, they remain below seasonal averages, indicating some resilience in the market despite prevailing uncertainties.

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Commodities

Nigeria’s Petrol Imports Decrease by 1 Billion Litres Following Subsidy Removal

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Ship Aveon Offshore

Nigeria’s monthly petrol imports declined by approximately 1 billion litres following the fuel subsidy removal by President Bola Ahmed Tinubu, the National Bureau of Statistics (NBS) reported.

The NBS findings illuminate the tangible effects of this policy shift on the country’s petroleum importation dynamics.

Prior to the subsidy removal, the NBS report delineated a consistent pattern of petrol imports with quantities ranging between 1.91 billion and 2.29 billion litres from March to May 2023.

However, in the aftermath of Tinubu’s decision, the nation witnessed a notable downturn in petrol imports, with figures plummeting to 1.64 billion litres in June, the first post-subsidy month.

This downward trend persisted in subsequent months, with July recording a further reduction to 1.45 billion litres and August witnessing a significant decline to 1.09 billion litres.

August’s import figures represented a decrease of over 1 billion litres compared to the corresponding period in 2022.

The NBS report underscores the pivotal role of the subsidy removal in reshaping Nigeria’s petrol import landscape with the Nigerian National Petroleum Company emerging as the sole importer of fuel in the current scenario.

Despite higher petrol imports in the first half of 2023 compared to the previous year, the decline in June, July, and August underscores the profound impact of subsidy removal on import dynamics, affirming the NBS’s latest findings.

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Crude Oil

Nigeria’s Oil Rig Count Soars From 11 to 30, Says NUPRC CEO

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Nigeria oil rig

The Chief Executive Officer of the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Gbenga Komolafe, has announced a surge in the country’s oil rig count.

Komolafe disclosed that Nigeria’s oil rigs have escalated from 11 to 30, a substantial increase since 2011.

Attributing this surge to concerted efforts by NUPRC and other governmental stakeholders, Komolafe highlighted the importance of instilling confidence, certainty, and predictability in the oil and gas industry.

He explained the pivotal role of the recently implemented Petroleum Industry Act (PIA), which has spurred significant capital expenditure amounting to billions of dollars over the past two and a half years.

Speaking in Lagos after receiving The Sun Award, Komolafe underscored the effective discharge of NUPRC’s statutory mandate, which has contributed to the success stories witnessed in the sector.

The surge in Nigeria’s oil rig count signifies a tangible measure of vibrant activities within the upstream oil and gas sector, reflecting increased drilling activity and heightened industry dynamism.

Also, Komolafe noted that NUPRC has issued over 17 regulations aimed at enhancing certainty and predictability in industry operations, aligning with the objectives outlined in the PIA.

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