The oil market edged higher in the Asian session, extending its gains to London trading, as Saudi Arabia’s promise to cut exports by 1M barrels in its attempt to make its way to the top under the yoke of growing American supplies provided significant sentiment boost. Saudi Arabia has adopted a complex approach to show traders that supplies are declining. The cartel participants will meet on the 7th – 8th of August to report on how each of the members sticks to the production plan. The meeting in May with the same agenda proved to be a big miss (the degree of commitment fell to 78%) and pushed the market down. This time, Saudi Arabia hopes that the news will provoke a positive backlash.

On the US side, the rig count decline did not last long, as the oil gains prompted US producers to respond by stepping up the drilling pace. According to the weekly data of Baker Hughes, the number of rigs increased from 764 to 766, swinging up and down for the fourth week in a row. This shows that the oil market has reached a fragile equilibrium and that further growth in oil prices will be accompanied by an increase in drilling activity in the US, which in turn will drag the market back to a price equilibrium of around $50. Any negative updates from OPEC or the US can turn badly for the balance, by sending prices below $50. The futures market also sent a positive signal, where according to CFTC data net position for crude oil grew for the fourth consecutive week, reaching a three-month high of 423.3K contracts.

Spring US output missed estimates, suggesting that the economy falling short of forecasts is taking on a chronic form. Out of the total of indicators, only the leading indicators remain positive, such as consumer sentiment, orders for durable goods and so on. In the second quarter, GDP grew by 2.6% in annual terms, with a forecast of 2.7%. Labour costs – an indirect indicator of wage growth in the economy – increased by 0.5%, while the forecast called for a 0.6% increase. This lag is positive for export growth, but it is negative for inflation. Since a weak dollar increases the revenue of the US exporters and the Fed is increasingly inclined to support a soft stance, shares of exporters, as well as some commodities, received an additional room for growth.

For EURUSD trading on Monday, it is necessary to focus on inflation data in the eurozone, as a positive deviation will reinforce the case for tapering off in September, pushing the common currency higher. There is an obvious divergence between the ECB stance, investors’ expectations and economic statistics and if the data are optimistic, officials will probably have to lean towards an accelerated path of tightening. We are still waiting for a correction on EURUSD, but an active sell-off could probably start a little higher, after bumping into resistance around 1.18.

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