Oiling the gears for an output cut

Opportunities remain bountiful when one keeps on looking. 

Oil pipe
Source: Bloomberg

The dollar index clocked its first decline in two weeks at the start of the week while the stock indices wavered last week. Oil had been the latecomer to the latest rally game but has finally showed a substantial pick up in prices in the lead up to the November 30 meeting.

Early Tuesday hours saw WTI futures surging above $48.00/bbl clocking a fresh three-week high. Reports of OPEC technical committee making progress in the first of their two-day meeting raised hopes of an output agreement in their upcoming November 30 meeting. What made the difference between a $46.00/bbl optimism and the optimism at the current level had been collective effect of the comments from the Russian President, Iranian Oil Minister and Iraqi Oil Minister, representatives of the wild card producers in the formulation of this deal. Jitters should nevertheless be expected ahead of the meeting at the end of the month, as it represents a huge event risk.

In a best case scenario, a convincing agreement could finally deliver the bump in prices above $50.00/bbl once again. The market had been mixed with regards to the price that would wake the sleeping giant of US producers. While there is certainly no textbook calculation to a one-size-fit-all breakeven price, a further rally in prices could certainly meet with resistances. This is now more so with the uncertainty that President-elect Donald Trump brings for US oil production.

The oil euphoria overflowed into the S&P 500 index on Monday. A smooth passing of the baton from the financial sector to the energy sector was seen, popping the S&P 500 index up to a fresh all-time high of 2198.70 ahead of Monday’s close. Early movers in Asia picked up the strong leads primarily via the oil channel with ASX 200 and KOSPI in substantial gains. The exception had been the Nikkei as a result of USD/JPY moves.

Forces of nature were seen disrupting the USD/JPY trend, which dipped shortly after news of an earthquake struck Japan off the coast of Fukushima. This had triggered a mild tsunami upon the nuclear plants that were hit in the March 2011 disaster. Prices were last seen dipping by more than 60 pips. Barring further disturbances, the USD/JPY dip may be a shallow one supported by fixed income flows. Nevertheless, this may take some heat off the dollar index, last seen sliding to sub-101.00 level despite the implied probability of a hike rising to an unprecedented 100% for December’s meeting.

Yesterday: S&P 500 +0.75%; DJIA +0.47%; DAX +0.19%; FTSE +0.03%

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