Oil’s post-OPEC gains remain capped

(Ipek Ozkardeskaya – Swissquote Bank Ltd)

The European natural gas futures jumped 30% yesterday, the euro fell further against a broadly stronger US dollar, and crude oil limbed above the $100pb mark, as OPEC decided to cut production by 100’000 barrels per day, to the August levels, as they wanted to ‘stabilize’ oil prices after the longest price decline since the beginning of the pandemic.

In reality, OPEC is not happy to see oil prices ease with the recession talk, and cutting supply suddenly dwarfs the demand side of the problem and should, in theory, reverse the trend back to bullish. If, of course, we forget about the Iran leg of the equation. Because if the US reaches a nuclear deal with the US, and bring around 4 mio extra barrels per day, the 100’000 cut from OPEC will look ridiculous. The problem is, the Iranians are now selling drones to Russians, and that could complicate the already complex talks between the US and Iran, and delay, or even block the deal.

For now, the barrel of US crude couldn’t clear the $90 resistance, as no one really knows what could happen in the complex politics of the oil market, and the recession worries weigh on the demand outlook. The price remains comfortably in the down trending channel building since the June peak, near $123 per barrel. Offers are placed above the $90 level, while buyers wait in ambush into the $85 per barrel, the short-term direction is blurry.

What is clear, however, is that the OPEC decision to cut oil output in the middle of a deepening energy crisis has been very much unwelcomed by the West and set the stage up for windfall taxes for energy companies. Macron is the latest European leader to back a EU-wide windfall tax on energy companies to finance the help that the government will, and should provide to the economy to weather the impact of the extended damage caused by soaring prices.

Would that shoot the European energy companies dead? Certainly not! The oil and gas companies will continue making decent profit and are still a good hedge against the actual macroeconomic meltdown, which is mostly caused by the soaring energy prices. TotalEnergies for example jumped more than 3% in Paris yesterday, while the CAC40 slid 1.20%.

The British FTSE index could even eke out a small gain yesterday, as BP gained more than 2%, while Glencore rallied more than 4% as the 30% spike in the European natural gas prices boosted the demand outlook for coal this winter.

Truss’ little convincing victory

Liz Truss won the PM race, but she won a difficult mandate, as she will have to reunite a country faced with skyrocketing inflation, a deepening energy crisis, diving living standards, industrial unrest, deteriorating public services, and higher interest rates.

She wants to slash taxes and she wants the Bank of England (BoE) to stop focusing on inflation, and focus on growth instead, to conduct the monetary policy. The problem with that is, if you try to boost growth when inflation, and debt are on such a steep rise, you can only overheat the economy and cause more damage.

Anyway, the pound’s reaction to Liz Truss victory has been reasonable. Cable fell to a fresh low, on the back of a broadly stronger US dollar, but the pair rebounded, as many traders took profit on the Liz Truss bet and walked away. Liz Truss also reserved up to £130 billion to limit households’ annual energy bill to below £2000, compared to around £3600 projected for this winter. That is giving a certain boost to the pound this morning. But, of course, the risks remain tilted to the downside for the pound sterling, as investors are worried about the policies that Liz Truss will put in place, and their economic implications. Parity is still in radar for the pound bears.

Elsewhere

The Reserve Bank of Australia (RBA) raised its policy rate by 50bp as expected today. It was the fourth consecutive rate hike that brought the Australian policy rate to the highest levels since 2015. The RBA also said that if the data required, they would follow with further rate hikes in the coming months. The AUDUSD was slightly better bid after the rate hike. News that China will speed up infrastructure spending to stimulate growth helped.

RBA hikes – A lot more to come [Video]

(Clifford Bennett – ACY Securities)

The Reserve Bank of Australia raised the official cash rate by 50 basis points to 2.35%. The accompanying statement left us in no doubt that significant further interest rate increases are likely. The economic impact, including mortgage stress, will be far more intense than people had been expecting. The outlook for the stock market, property prices and the Australian dollar is negative.

Read USDCAD Outlook: Ascending channel favours bullish traders ahead of BoC on Wednesday

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