Bulls in the oil market exceeded the plan last week so this week they took a well-deserved break. Prices retreated on Wednesday from a three-year high; for WTI the peak was at $ 69 per barrel, for Brent – $ 75 per barrel. The number of traders looking for easy sell trade is growing while other part of investors take profits from the bull run last week. News-driven impulse has been subsided this week with data from API on US stocks, which showed an increase of 1.1M barrels last week.
Of course, despite the drop into negative zone, the market remains bullish, as the period of oversupply that started in 2014 ended thanks to OPEC production cuts and growing world demand.
The coordinated actions of OPEC and Russia allowed the world’s reserves to return to the average level in five years, which can be considered a successful accomplishment of the task. Officials of several oil powers lavishly supplied the market with hints that a shortage might soon appear in the market. The Russian Minister of Energy, Alexander Novak, allowed the possibility of permanent cooperation between OPEC and Russia. Increasing the chance of rigging the oil supply will allow these countries to keep oil prices at the desired level, irrespective of fluctuating demand and other shocks.
It is worth to expect medium-term oil rise because the futures market is traded in backwardation. This market condition means that a contract for the supply of oil in a month is more expensive than a contract for a longer delivery period. The higher the price, the lower is the demand or the higher the supply at one time or another, so the price curve looks like a hyperbola. This structure of prices in the futures market is beneficial for OPEC because it forces US producers to sell as much as possible now and accumulate less oil for the future, which effectively reduces global reserves. Actually, for OPEC in the absence of an opportunity to negotiate, this was one of the few ways to influence American producers indirectly, through the market.
The only drawback of this strategy is the growth in US production. Given that for shale oil production, costs are about $ 40 per barrel, the price increase will bolster more drilling. However, there are number of reasons to believe that OPEC’s efforts compensate for the growth in US production. Firstly, this is a refining capacity for US oil in the world, which is still limited due to the orientation toward OPEC oil. Secondly, these are political nuances, namely the tension between China and the United States, that is, the profile of oil consumption by the eastern economy, will continue to contain predominantly traditional suppliers, such as Russia, Saudi Arabia, Angola. In the third place, this is a change in the competitive market for at least some kind of coordination of production in the US, which will also have a positive impact on prices.
So far, the production of American oil is somewhere between 10 and 11M barrels per day, raising the US to the second line after Russia. Commercial depots were emptied in the US at 1.1M barrels in the week ending April 20 to 429.1M barrels.
Based on the reasoning above, we can assume that oil will now feel the bottom, get rid of weak hands, and then continue to grow. The successful coordination of OPEC and Russia really outweighs the US output as the main factor of influence on the market, which traders questioned until recently. The level of $ 64-65 per barrel WTI can be considered a platform where the growth is likely to resume.
The Bank of England, or rather its head, Mark Carney, remains a tough nut to the minds of investors. In the second half of last year, he signalled that the threat of an inflationary spiral was hanging over Britain and despite the unresolved Brexit, the cost of borrowing in the economy may not remain at a low level. After the rate hike in November last year, the February statement was a surprise for the markets, where Carney and some other officials said that the rates could grow slightly faster than the market believed. After the March meeting where two members of the Committee on Monetary Policy spoke in favour of raising rates, the market began to prepare for this event in May, until last Thursday. Then Carney, in an interview with the BBC, blamed everything on the mixed data and discord in the committee indicating that May is not the only meeting this year and a rate hike can occur at the next meetings.
Pound quickly learned the lesson and went below 1.40, but should we expect further decline? Part of the loss was due to Carney comment, but the pound was also hit hard by the dollar’s rise. Therefore, how badly Carney penned the pound is not entirely clear. However, one thing is clear: inflation slowed sharply to 2.3% in March and a delay in May with a rate increase creates risks of excessive cooling of the economy. The pound has been growing fast lately and obviously it was not the result of the rate hike in November, but other fundamental drivers. Therefore, the rate increase is a reasonable response to the slowdown in inflation as a result of the appreciation of the pound. Also, Carney is known for his surprises and sharp maneuvers in their policy, so to exclude the May rate hike is completely impossible. A successful entry into this situation is seen buying GBPUSD from the level of 1.3750-1.3850, but again, everything can spoil the dynamics of the dollar, which today is a popular asset among investors.
The pound could seriously react to consumer confidence data from GdK on Thursday, as in conditions of growing real incomes, consumer confidence growth will signal a rise in consumption, i.е. economic pickup. On Friday, the pound is waiting for data on the services sector and GDP, so at the weekend it is worth seriously considering buying GBPUSD, as well as sell EURGBP on Thursday in the case of Draghi’s soft rhetoric.