Despite the catchy headlines of the reports covering the OPEC meeting, the oil market preferred to read between the lines, making frowning conclusion from the statements: the cartel members could not move further from the mere awareness that the threat of oversupply exists.
The meeting of Saudi Arabia, other members of the cartel and Russia ultimately produced only a recommendation to curb production, without a formal agreement on how much oil should leave the market.
Representatives of the OPEC countries hit the wires with comments on Wednesday on how important it is to cut production now, and the Russian representative confirmed that the meeting was constructive, but the result will be announced at a meeting in Vienna today. As a result, relying on positive rhetoric, oil prices may spend the day in positive territory, waiting for fruitful decisions.
Most likely the participants will agree on the extension of the existing production quotas. But some of the Russian producers have already expressed doubts about the possibility of cutting production due to seasonal difficulties, for example, Lukoil.
After the statements from Oman delegates that decline in production could be as low as 1 million barrels, prices fell. This may indicate that the market expects more serious concessions from OPEC.
The growth of commercial inventories in the United States so far effectively prevents the growth of positive sentiment in the oil market, which, moreover, is gradually accepting the hypothesis of a global slowdown in demand. In such conditions, output cut is an obvious necessity for OPEC, but the whole question is how much the members of the cartel are willing to sacrifice in order not to infringe upon their national economic interests.
Yesterday there were reports that Huawei CFO was detained in Canada on request of the US. The part of the market that has relied on the rapprochement of China and the United States after the meeting in Argentina is likely to start correcting its wrong hopes, this can now be seen from the fall of US stock futures. SPX, with ease, punctured the 2,700 mark down, Wall Street is likely to hold in sales today.
A top manager of a Chinese company is awaiting extradition to the US after being detained on the first of December, that is, before Trump and Xi meeting. Most likely, the reason for the arrest was the involvement in the sale of HP equipment, to the sanctioned Iran. It is unlikely that Trump did not know about this and did not authorize the detention, so he won’t be able to portray a surprise. And if he knew, the reaction of the markets was easy to predict, the fragile expectations due to the uncertainty with the tariffs only increases the amplitude of the negative reaction. The costs of creating additional tensions with China are high, so the reason is serious, and the dust will not be settled down quickly. The short trade of the S&P 500 now looks like an easy bet as the truce in a trade war can easily be broken.
The Fed released the Beige Book on Wednesday with pretty rich content for even polar interpretations. On the one hand, the number of references to the word “tariffs” decreased from a peak of 51 to 39 in December, on the other hand, the number of references to the word “slow” rose to the highest level in 2018. The frequency approach to analyzing the content of the Beige Book is justified by the fact that the Fed gathers anecdotal feedback of company managers, economists, market experts from different US districts about economy situation in the country. The citation of some actual words allows us to assess the general mood of the respondents.
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