Oil won't freeze?

In the words of Ron Burgundy, ‘Well that escalated quickly’, the OPEC-Russian ‘accord’ appears to be over before it began.

Source: Bloomberg

Talk is cheap(ening oil)

Saudi Oil Minister Ali Ibrahim overnight stated, ‘Producers will hopefully meet in March to negotiate an output freeze, but production cuts will not happen’.

Russian Energy Minister Alexander Novak on Saturday stated, ‘[A] deal, which is contingent on other producers participating, should be finalised by March 1’. 

Iranian oil minister Bijan Zangeneh in an interview on State Press TV from Tehran, ‘This is more like a joke that they (Saudi Arabia) tell us they would freeze their production above 10 million barrels a day and that we should also in turn freeze our production…We will only commit to freeze production once output has reached pre-sanction levels’.

Pre-sanction levels means Iran will be lifting current production by approximately a third which will see it moving to the fourth largest producer in OPEC (overtaking Iraq).

Iran produced 2.86 million barrel of oil a day in January (the level the accord want Iran to freeze at) and is looking to add an extra 600,000 barrels to move to 3.6 million barrels a day.

Politics was always going to scuttle this apparent ‘deal’ and although a miraculous deal may come to fruition next Tuesday on ‘special compensations’ or ‘clauses’ to accommodate Iran et. Al, the talk from last night all but ends the Saudi-Russian-Qatari-Venezuelan lead deal.

The oil trade

Oil remains an exciting trading opportunity.

I see the April contracts in WTI and Brent finishing in the low to mid US$30 a barrel for two reasons.

Despite the political storm in OPEC there is a natural demand increase from China leading into the northern summer, and the US is beginning to see rig count declines.

However, there is record stock piling and the over-production issues will cap the price of oil in a sub-US$40 a barrel range. This forms my trading strategy:

  • Buy WTI at or below US$30 a barrel even with the collapse of this deal
  • Sell WTI at or above US$37 a barrel as the supply side of the equation will not justify a higher price and Iranian numbers filter out

The AUD perfect storm

We continue to watch the AUD and are currently reviewing our reasoning why the AUD is facing a perfect storm. The slight weakness last night may provide a buying opportunity.

Pairs to trade are EUR, GBP (Brexit issues also part to play) and JPY.

The perfect storm trade

  • Carry trade – AAA sovereign rating, a budget in relatively good shape compared to global peers, and bond yields over 200 basis points ahead of global peers.
  • Commodity bounces – iron ore is clearly a public and private firm positive, however the oil price bounce is also a risk on positive seeing risk currencies returning to the fore.
  • RBA rates – the cash rate is likely to be rooted to 2% despite calls to see it lowered. The fact that the Reserve Bank of Australia (RBA) itself wants the AUD at around US$0.65 suggests this rate could be lowered. However, the heat that the rate cut could put into the domestic market is a risk too far for the RBA in these current conditions.

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