Dude, where’s my oil?

OPEC+ agrees to increase output

The most anticipated OPEC+ meeting of the year turned out to be a damp squib in the end. OPEC+ agreed to increase output in July and August to 648,000 bpd from the previously agreed 432,000 bpd, with the increased allocation spread across all its members, including, you guessed it, Russia. Given most of OPEC can’t even meet their present targets, with only Saudi Arabia, the UAE, and possibly Iraq, having any sort of spare capacity, and with Russia under sanctions, the entire exercise was nothing more than window dressing.

It is clear which side OPEC’s bread is buttered on and you’d have to say Vladimir Putin is having a good week by his lowly standards. Progress in Eastern Ukraine, OPEC clearly not wanting to upset him, and now a Russian restriction on noble gas exports. (these are inert gases used in the production of semiconductors amongst other things) Ukraine previously produced 30% of the world’s noble gases by the way. He must be loving it when a plan comes together.

The minuscule increase in production was a sop to US President Biden but won’t change a thing in the supply/demand equation on international markets. President Biden is going to have to show up with a lot more goodies on the table during his upcoming visit to the Middle East to change that dynamic. Saber rattling against China, and a vacuous trade agreement that provided no access to US markets, as per his recent trip to Asia, just isn’t going to cut it. To paraphrase Jerry Maguire, if you want to cut Russian and Chinese influence everywhere Joe, show me the money.

Markets clearly felt the same as oil, which had plummeted pre-meeting on hopes of a much larger increase in production, reversed all their losses. Further indignity was served up by official US Crude Inventories, which plummeted by just over 5 million barrels overnight. That saw both Brent crude and WTI finish a huge turnaround, closing around 2.0% higher on the day.

With Brent crude and WTI within shouting distance of USD 120.00 a barrel, that made the overnight rally by US equities even stranger things. Wall Street booked impressive gains overnight and I can only put it down to a very weak ADP Employment release, only gaining 128,000 jobs, while April Building Permits fell by 0.60% and April Factory Orders MoM for April only rose by 0.30%.

It was the ADP Employment data that did though, even though it is an appalling indicator for the US Non-Farm Payrolls. I note the JOLTs data this week still showed two jobs for every unemployed American, something Lael Brainard also noted overnight. Still, why let reality get in the way of a good story? A slowing US economy equals less Fed tightening equals lower terminal interest rates equals buy everything. The rally by Wall Street sparked a correlated risk-on rally across the rest of the markets. US yields edged lower, the US dollar got thumped, with risk-sentiment fashionistas the euro, Australian dollar and New Zealand dollar booking impressive gains. Even Bitcoin and gold rallied as they are inflation hedges, I mean deflation hedges, I mean stagflation hedges; oh, never mind.

We can take two things out of the overnight price actions. Equity markets, having been programmed to buy any dip over the last two decades thanks to the asset price backstop of global monetary policy, are looking for even the most tenuous reasoning to price the end of the bear market. Secondly, the trajectory of US interest rates is the one ring to rule them all with global markets and asset classes everywhere.

Tonight’s US Non-Farm Payroll data is expected to ease to 325,000 jobs added. A large deviation above or below that number should produce a very binary outcome for the FOMO gnomes of the stock market, and by default, be reflected in other asset classes. A high number equals Fed tightening with lots of 0.50% increases, remains on track, equals sell equities, sell currencies, buy US dollar, sell bonds, sell gold. A low number equals less Fed tightening, buy equities, buy currencies, especially EUR, AUD, NZD, and EM, buy bonds, buy gold, and because it’s the weekend, let’s buy some crypto as well. Volatility is the winner either way.

Moving out of the tail-chasing Lala land we call the US financial markets and into the real world, we see a raft of Services PMIs for May also released today. Asian releases have been a mixed bag. Australian Services PMI caught a cost-of-living sniffle as it fell to 53.2 from 56.1 previously. In contrast, Japan’s Jibun PMI rose from 51.7 to 52.6 this morning as the reopening boom continues there. European Services PMIs have obvious downside risks as will India’s at 1300 SGT today as rising living costs bite.

None of that should influence the Reserve Banks of Australia and India next week, which will both hike policy rates again. Indonesia’s CPI yesterday was benign and will likely stay the Bank Indonesia’s hands this month. We can pencil in another rate hike from the Bank of Korea in July for sure after South Korean inflation for May YoY blew through the topside, rising by 5.40%.

Holidays will impact trading volumes and liquidity internationally today. Mainland China, Hong Kong, and Taipei are all dragon boating. Thailand celebrates their Queen’s birthday. Meanwhile, the UK will be closed again for neighbourhood street parties to celebrate the Queen’s platinum jubilee. Congratulations Your Majesty. On Monday, most of Europe is closed for Whit Monday, with holidays also in New Zealand, South Korea, and Malaysia.

Finally, I know markets can remain irrational longer than you can stay solvent, but did I mention that oil is approaching USD 120.00 a barrel, and Russia now controls large swaths of the global wheat and plant oil supply, and noble gases? Just saying….

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is OANDA’s senior market analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia as well as in leading print publications including the New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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