OPEC+ hammer out production deal
With US oil output on the rise, OPEC+ couldn’t allow the Americans to win market share at their expense. After a few extra days of negotiations, OPEC+ crawled towards a deal that paved the way for the gradual easing of production cuts over the coming months. OPEC+ at all costs needed to avoid a taper tantrum, so a small hike in January was acceptable for the Saudis. A monthly increase of 500,000 barrels per day in January will replace the 1.9 million increase that is currently in place.
Both WTI crude and Brent prices pared gains following the output hike announcement.
With COVID vaccine immunizations starting this month, expectations are high for the virus lockdowns to improve in January and steadily as vaccines are produced and distributed. OPEC+ will decide monthly on how much more oil should come online. OPEC+ avoided oversupply concerns, as a 0.5 million increase in output allows stockpiles to decline over the next few months.
If the global economic recovery is stronger than expected, you can expect to see terrible compliance next year and eventually the OPEC+ pact will be terminated.
OPEC+ will get the market back into backwardation and energy markets can comfortably price in higher prices over the next few years.
Gold eyes USD1850 line
Gold’s early rally from stimulus hopes and a softer dollar was slowly erased after improving US data triggered flows into equities. Selling pressure intensified for gold after Senator Schumer noted that Senate Majority Leader McConnell does not seem inclined to compromise.
Gold will need to survive tomorrow’s nonfarm payroll report for a break of the USD1,850 level. The key to Congress reaching a deal on a stimulus package could come from tomorrow’s nonfarm payroll report. The last nonfarm payroll report of the year could show the labor market is in worse shape and that long-term unemployment is out of control.
Gold’s longer-term outlook is still very bullish, thanks to next year’s reflation trade, but the immediate drivers of falling physical demand will complicate price action over the next couple of weeks. The Fed and ECB will provide support for the stimulus later this month, but gold needs lawmakers in DC to deliver at least USD500 billion before the holidays.