OPEC announces slight production cut: oil goes wild

Mashallah! OPEC agrees to a surprise output cut of 750,000 barrels per day of output, putting a ceiling on output for the organisation of 32.5 million barrels per day.

  • Oil prices have surged on the back of announcements, with WTI oil gaining 4.5% to close at US$46.66 and Brent gaining 5% to close at US$48.27. The details sound a bit fuzzy at the moment with Iran saying there has been no ceiling on their output levels and the production cut is much more modest than some of the proposals that had been floated. There is the possibility that OPEC managed to commit to a weak deal at this meeting that may pave the way for a more comprehensive production cut at the November meeting. Previously there were proposals that Saudi Arabia would cut its production by 1 million barrels per day alone. And Russia has previously made overtones that it would also be willing to agree to a joint deal with OPEC. A more comprehensive deal from OPEC and Russia at the November meeting would easily clear the way for WTI oil to trade around US$55.
  • This provided a major stimulus to US equities as the S&P 500 gained 0.5% to 2171. But the energy sector was a huge driver of the gains as it rallied 4.3% alone – the biggest one day gain for the sector since January. The materials space was also a major winner as it gained 1%.
  • US EIA crude oil inventories also surprised market expectations for a 3 million barrel increase by declining by 1.9 million barrels. This has now been four straight weeks of back-to-back declines in crude oil inventories, which is also very supportive of the spot price. Although gasoline inventories did see an increase raising some concerns about future demand.
  • Obama’s veto over legislation that would allow US citizens to sue Saudi Arabia for their alleged involvement in the 9/11 terrorist attacks (JASTA - Justice Against Sponsors of Terrorism Act) was overturned in Congress. His veto has been overruled in the Senate and House after being carefully timed to play into the election cycle where elected officials are loathe to vote against such an emotive issue, even one based on a relatively paranoid conspiracy theory. But it may well play into the prospects for a more comprehensive OPEC deal as Saudi Arabia is already in a dire fiscal situation and the prospects of major class action lawsuits from victims of the 9/11 attacks are unlikely to be relished by the Saudi Arabian territory.
  • Deutsche Bank bounced back, rallying 2% overnight after they announced that they were selling their UK insurance unit and CEO John Cryan ruled the need for a capital increase. This helped European shares as a whole, with the Euro Stoxx 50 rallying 1.6%.
  • The Bloomberg commodities index gained 1.2%, primarily helped by oil, but copper also gained 0.8%.
  • Emerging markets were also a major winner from the oil rally with the EEM Emerging Markets ETF gaining another 1%.
  • High-yield debt, which has been closely correlated with oil over the past 12 months, also added another 0.7% overnight. HYG, the major high-yield debt ETF, reached a new 52-week high overnight as well.
  • Federal Reserve (Fed) chair Janet Yellen also spoke last night, which saw the US dollar rise as she said the majority of the Fed sees an interest rate hike as likely this year. Although the DXY dollar index closed the session relatively unchanged, up 0.04%.
  • Asian markets look set for a strong open across the region. The commodities-heavy ASX is looking to open 0.8% as news from the OPEC deal is likely to buoy the index. ASX SPI futures are pointing to a 43-point gain at the open. BHP’s ADR also saw a 4.6% gain in the US session overnight, while CBA’s ADR gained 1.3%. A 0.3% weakening in the yen overnight is likely to help the Nikkei today, with it currently looking set to open 0.7% higher. And the ASHR China A-shares ETF gained 0.4% overnight, boding well for Chinese markets in Hong Kong and the Mainland as well today.

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