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What’s the good oil?

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By Jeffrey Halley

Oil markets are on the move Thursday morning, with oil prices dipping by 2.0% in early trading after the Financial Times reported that Saudi Arabia has indicated to western allies it could raise production to cover any substantial fall in Russian production.

That follows our earlier comments that this week’s OPEC+ meeting later Thursday could be pivotal if Russia is given an exemption from its production quotas, which would allow the two main swing producers, Saudi Arabia and the UAE, to ramp up exports to fill the gap.

None of that will alleviate the refining bottleneck and crunch that is causing petrol and diesel prices to soar, but it would be a rare piece of good news for the world economy and the inflation fight.

It isn’t in OPEC’s interests to send the world into a recession, and probably the only loser would be Russia which is making more money today than pre-Ukraine invasion, thanks to soaring crude prices.

The OPEC+ meeting may even overshadow the US Non-Farm Payrolls release this week, and if it results in sharply lower oil prices, look for a potential rally in equity and bond markets as hiking outlooks are pared.

Overnight, the opposite occurred, after mostly robust US data had markets rolling back their over-optimistic expectations that the Federal Reserve wouldn’t have to hike as much as indicated.

US JOLTS Job Openings in April eased slightly to 11.4 million, just above expectations and two job openings for every unemployed American. JOLTS Job Quits remained steady at just above 4.4 million.

Following on from firm Retail Sales recently, ISM Manufacturing shrugged off the gloom in Asia and Europe by unexpectedly rising to 56.1, versus an expected drop to 54.5. ISM Manufacturing Orders also rose to 55.1, although ISM Manufacturing Prices slipped to 82.2.

ISM Employment fell to 49.6, but the JOLTS data suggests that is because of a lack of workers, not easing labour market requirements.

Despite concerns around the housing market, and rightly so, the US economy continues to fire on all cylinders. Nothing in that data will give the Fed any concerns about the trajectory of rate hikes, so 0.50% hikes until September it is, and quantitative tightening proceeds.

The biggest beneficiary was the US Dollar, which soared against the Sterling and Euro overnight, given their soft data this week. That was helped along by US yields along the curve firming modestly.

Wall Street equity markets retraced, but I believe the only modest reaction by the bond market, limited the damage.

Probably the most head-scratching move was by gold, which rose slightly, despite a higher US Dollar. That said, I remain concerned about the recent underwhelming price action by gold.

In Asia, the Thursday calendar is fairly thin with the Manufacturing PMIs now out of the way.

Australia’s April Balance of Trade outperformed, rising to AUD 10.495 billion. Retail Sales fell slightly as expected but printed right on forecasts at 0.90%. At midday (SGT), Indonesian Inflation for May is released and is expected to rise slightly YoY to 3.60%. That probably won’t be enough to force Bank Indonesia’s hand and hike rates at the June meeting, and nor has a slightly wobbly Rupiah detracted them from supporting Indonesia’s post-pandemic recovery. A print above 4.0% may change that stance though.

Eurozone PPI will be a non-event after the PMI and GDP prints earlier in the week signaled already, that stagflation is alive and well in the war-time economy of Europe.

US Factory Orders will grab some attention, especially if the figure is weaker, and market pundits will try and extrapolate Friday’s US Non-Farm release from Thursday’s ADP Employment, usually a fool’s errand.

None of this really matters, because it will all be about the outcome of the OPEC+ meeting.

Oil sinks in Asia

Oil prices fell in Asia Thursday after the Financial Times ran a story that Saudi Arabia has indicated to western allies that it could raise oil production if Russian out fell substantially. Overnight, oil gave back all its gains after a WSJ story released Wednesday morning suggested that OPEC+ might exempt Russia from its production quotas.

Taken in totality, Thursday’s OPEC+ meeting is assuming far greater importance for markets than the US Non-Farm payrolls on Friday.

If OPEC+ does nothing but raise production by the 433,000bpd already planned, oil prices are likely to rally sharply, with knock-on impacts in Asia and Europe equity markets. If Russia is exempted and Saudi Arabia and the UAE (the only two real swing producers), signal they will step up production, we can expect oil prices to fall sharply.

Overnight, Brent crude finished just 0.33% lower at $115.85, having tested $118.50 a barrel intraday. In Asia, is gapped lower, falling by 1.505 to $114.15.

The overnight close at $115.85 is immediate resistance, with support at 112.00. There is a very well defined rising 6-month support line on Brent at $104.50, with the 100-DMA also nearby. A daily close below this point should allow Brent crude to retest $100.00.

WTI also tested higher overnight, rising to $117.85 a barrel, before giving back all its gains to close 0.40% lower at $114.80.

In Asia, WTI also fell by 1.50% to $113.00. Immediate resistance is the overnight close at $114.80, with support at $111.60 and then 108.00. WTI’s 6-month support line lies at $102.50, followed by the 100-DMA at 101.00. Failure of these levels signals a move back to the mid-90s in the first instance.

Gold defies stronger Dollar

Gold defied expectations overnight, shrugging off slightly firmer US yields and a higher US Dollar to record a 0.50% gain to $1846.65 an ounce. The price action has left me scratching my head a bit, and I can only assume some risk aversion flows lifted gold as the hot money retreated from other asset classes.

In the context of gold’s overall performance, I would need to see quite a few more days like this before changing my bearish outlook, with the gains overnight, insignificant in scope. In Asia, gold has eased infinitesimally to $1845.00 an ounce.

Overall, gold remains confined to a $1830.00-1870.00 range, and one could argue a $1840.00 to $1860.00 an ounce range.

Gold’s inability to rally on recent US Dollar weakness remains a primary concern. It has resistance at $1870.00 and then $1900.00, where I suspect there will be plenty of options-related selling. Support is at $1830.00 and then $1780.00, and I do not discount a disorderly retreat if the latter fails.

 

Jeffrey Halley is Senior Market Analyst, Asia Pacific at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.