Why is OPEC+ Cutting Oil Output?

Commodity

Summary:

The Organization of the Petroleum Exporting Countries and allies including Russia, a group known as OPEC+ which pumps around 40% of the world's crude, agreed on a new oil output deal on Sunday.

Saudi Arabia, the group's biggest producer, will make a deep cut to its output in July on top of a broader OPEC+ deal to limit supply into 2024 as the group faces flagging oil prices.

A surprise announcement by OPEC+ in April to deepen production cuts helped to raise prices by about $9 a barrel to above $87 per barrel in the days followed.

Yet benchmark crude prices have shed those gains since, with Brent futures on Monday trading at just under $78 a barrel.

On Sunday, in addition to extending the existing OPEC+ cuts of 3.66 million barrels per day (bpd), the group agreed to reduce overall production targets from January 2024 by a further 1.4 million bpd to a combined output of 40.46 million bpd.

The changes, however, included lowered targets for Russia, Nigeria and Angola simply to bring them into line with current production levels.

Here are the main reasons why OPEC+ cut output:

Concerns About Weak Global Demand

Data from China has aroused fears that the economic recovery after coronavirus lockdowns by world's second-largest oil consumer is losing steam.

Russian Deputy Prime Minister Alexander Novak has also pointed to "interference with market dynamics", a Russian expression to describe a Western price cap on Russian oil.

Fears of another banking crisis in recent months have led investors to sell out of riskier assets such as commodities with oil prices falling to near $70 per barrel from a peak of $139 in March 2022.

A global recession could lead to lower oil prices.

Oil prices also recently came under pressure from concerns about U.S. debt ceiling negotiations, though fears of a debt default by the world's biggest oil consumer have abated since a bipartisan deal was sealed last week.

Punishing Speculators

The planned cuts will also punish oil short sellers betting on oil price declines.

In 2020, Saudi Energy Minister Prince Abdulaziz bin Salman warned traders against betting heavily in the oil market, saying that those who gamble on the oil price would be "ouching like hell".

He repeated his warning ahead of Sunday's meeting, telling speculators to "watch out" which many market watchers and investors interpreted as a signal that OPEC+ could consider further output cuts.

US Output Rising

U.S. crude oil production is set to rise by 5.1% to 12.53 million barrels per day (bpd) in 2023 and by 1.3% to 12.69 million bpd in 2024, according to government forecasts.

This compares with around 10 million bpd as recently as 2018.

Meanwhile, Saudi's energy ministry said the country's output, the biggest chunk of OPEC+ production, would drop to 9 million barrels per day (bpd) in July from around 10 million bpd in May, in its biggest reduction in years.

Saudi output is set to rebound to around 10 million bpd from August, unless market conditions prompt the kingdom to extend cuts.

Russia, the world's third-biggest oil producer, is targeting production of around 9.5 million bpd until the end of the year and 9.3 million bpd next year.

Tensions With Washington

Additional cuts from OPEC+ could drive tensions with leading consuming nations that are trying to fight inflation.

Washington called OPEC+'s action in April inadvisable.

The West has repeatedly criticised OPEC for manipulating prices and siding with Russia despite the war in Ukraine.

The United States is considering passing legislation known as NOPEC, which would allow the seizure of OPEC's assets on U.S. territory if market collusion is proven.

OPEC+ has criticised the International Energy Agency, the West's energy watchdog for which the United States is the biggest financial donor, for advocating oil stocks releases last year. The IEA had argued these were necessary to bring down prices given concerns that sanctions would disrupt Russian supply.

The IEA's predictions of price strength never materialised, prompting OPEC+ sources to say it was politically driven and designed to help boost U.S. President Joe Biden's ratings.

The United States, which released most stocks, said it would buy back some oil in 2023, but later ruled that out.

OPEC observers also say the group needs nominal oil prices to be higher because money printing by the West in recent years has lowered the value of the U.S. dollar, the currency in which oil is traded.

Source: The Globe and Mail

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Warren Takunda

Traders' Opinions

Stocks

Recent economic data releases from the United States have raised concerns among investors and analysts, highlighting a potential slowdown in the country's economic growth. The latest reports indicate a moderation in the services sector, factory orders falling short of expectations, and a reversal in the dollar's gains. These developments suggest a need for caution as market participants evaluate the health of the US economy and anticipate the Federal Reserve's next policy moves.

Slower Expansion in Services Sector

The Institute for Supply Management (ISM) reported that the US services sector experienced a significant slowdown in May, with the Services Purchasing Managers' Index (PMI) falling to 50.3 from April's 51.9. Although this reading indicates the fifth consecutive month of expansion, it represents the slowest rate in the current sequence. Key contributing factors to this deceleration include a decline in business activity, new orders, and employment, coupled with faster supplier deliveries. The drop in new export orders further underscores the challenges faced by the sector.

Factory Orders Miss Expectations

In April, US factory orders grew by 0.4%, falling short of market expectations of a 0.8% increase. While defense spending provided some support, overall growth was slower than the previous month. Notably, demand for transportation equipment, particularly defense aircraft and parts, remained robust. However, orders for fabricated metal products, primary metals, and computer and electronic products experienced contractions, highlighting the impact of higher interest rates. These figures suggest that certain segments of the manufacturing industry are facing headwinds.

Dollar's Retreat Reflects Concerns

Following the release of disappointing economic data, the US dollar relinquished its earlier gains and traded relatively unchanged. The ISM Services PMI decline and the below-forecast factory orders contributed to investor uncertainty about the future trajectory of the US economy. With the Federal Reserve's next policy decisions in focus, market participants are evaluating the likelihood of interest rate adjustments. Currently, opinions among traders are divided, with expectations of a rate increase in July decreasing since the ISM Services release.

Fresh data further extends Dow's losses

The Dow Jones Industrial Average experienced losses on the back of the economic data, declining over 150 points. The underperformance was driven by cyclical stocks, such as Caterpillar, Boeing, and 3M, which are sensitive to economic performance. In contrast, the S&P 500 and Nasdaq reached new highs, buoyed by gains in technology shares. Apple's stock, in particular, hit a record high as the company prepared to unveil a "mixed reality" headset at the Worldwide Developers Conference. Other technology giants, including Netflix, Alphabet, Oracle, Amazon, and Microsoft, also saw positive trading activity.

Gold Prices Respond to Weaker Economic Outlook

Gold prices experienced a modest increase, surpassing $1,950 per ounce. The minor decline in US Treasury yields and a weakening US dollar contributed to this uptick. The lackluster economic data reinforced expectations that the Federal Reserve may pause its tightening cycle in the near future. Despite the recent uptick, gold prices remain below the near-record high reached in early May, as traders anticipate prolonged elevated interest rates globally to counter persistent inflationary pressures.

The recent economic indicators from the United States paint a cautionary picture, suggesting a potential slowdown in the country's economic growth. The services sector's expansion has moderated, factory orders have fallen short of expectations, and the dollar's gains have reversed. These developments have prompted market participants to reassess the health of the US economy and speculate on the Federal Reserve's upcoming policy decisions. As investors navigate the uncertainties ahead, monitoring key economic indicators will be crucial in gaining insights into the trajectory of the US economy and its potential impact on financial markets.

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Kevin Du

Cryptocurrency

The capricious cryptocurrency's been uncommonly quiet over the past four weeks, bound in the range of $28,452 and $25,800. Even the end of the U.S. debt ceiling saga did little to whet risk appetite.

Bitcoin's volatility index is near 64, well below the 2023 peak of 116.5 touched in January, according to CryptoCompare. Overall daily cryptocurrency spot trading volumes - above $20 billion for most of the year - have languished at around $10.6-$12 billion in the last two weeks, data from The Block shows.

The data signals a reluctance of investors and traders to take positions in either spot or derivatives, said Noelle Acheson, an economist who has tracked the crypto sector for seven years.

This was echoed by Matthew Weller, global head of research at financial services group StoneX. "Looking at bitcoin's chart, traders are waiting for a definitive break away from the $27,000 level that has magnetically pulled prices back consistently," he said.

The world's biggest cryptocurrency is still the best-performing asset of 2023, with gains of about 62%. Yet it has slid nearly 14% from a peak of $31,035 in April, keeping nervy traders guessing about its next move.

Still waters run deep?

"The lack of anything interesting is also interesting," said Luuk Strijers, chief commercial officer at derivatives exchange Deribit.

Bitcoin's 7-day and 30-day implied volatility - options traders' expectation of future price turbulence - have slid to January lows of under 40%, after peaking at 76% and 67% in March, according to The Block.

"If implied volatility falls to rock-bottom levels, it can't go much lower," Strijers added. "Trading volatility, buying options in the absence of a price move, that's what people might do in this market."

Market positioning indicates the maximum pain level for the June 2023 options expiry for bitcoin is at around $24,000, which could act as a support or resistance level, according to analysts at Bitfinex.

"Traders should be prepared for potential market turbulence and short-term price fluctuations in the second half of the month," they said.

Longer term, in 2024, they expect bitcoin's halving - a technical adjustment that reduces the rate at which new coins are created - and the U.S. elections to ratchet up volatility.

The Bulls Are Hiding

Funding rates, which measure the cost of holding bitcoin via futures, have edged lower, indicating investors are less willing to pay to be long. It was last trading at 0.0098%, way below the 0.0302% seen in March.

"A bull market is easy, when everything is going up," said Thomas Kralow, a crypto hedge fund manager at Kralow Capital. "But it's markets like these where people lose money - because of false beliefs that we are finally turning the corner, which is incredibly hard to predict."

He added: "Right now with the drop in volatility, we have a few trades that we are open to hedge in case bitcoin drops down to $20,000."

Source: Devdiscours

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Samantha Luan

Forex

Australian Dollar surges broadly after surprised RBA rate hike. Tightening bias is also maintained, so more hike(s) could still be in the pipeline. The move in Aussie is taking other commodity currencies higher. Now, a focus will be on whether BoC would follow and surprises the markets too. At the other end of the spectrum, Dollar is sold off broadly today. Yen is following as the second worst and then Euro. Swiss Franc and Sterling are mixed.

Technically, some attention will also be on Dollar in the early part of the week. Near term price actions in EUR/USD, USD/CHF, USD/JPY and even GBP/USD are displaying corrective structures. That is, the greenback's rally against European majors and Yen shouldn't be over yet. Break of any of 1.0634 support in EUR/USD, 1.2306 support in GBP/USD, 0.9146 resistance in USD/CHF and 140.90 resistance in USD/JPY could be the early signal of resumption in Dollar's rise.

RBA Shoots up Aussie, Dollar Consolidating Against Europeans and Yen_1

In Asia, at the time of writing, Nikkei is up 0.69%. Hong Kong HSI is up 0.51%. China Shanghai SSE is up 0.05%. Singapore Strait Times is up 0.04%. Japan 10-year JGB yield is down -0.0040 at 0.430. Overnight, DOW dropped -0.59%. S&P 500 dropped -0.20%. NASDAQ dropped -0.09%. 10-year yield rose 0.0002 to 3.693.

RBA surprises with 25bps hike, to give itself greater confidence

RBA surprises the market by raising the cash rate target rate, by 25bps to 4.10. Tightening bias is maintained as "Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe".

The central bank noted that while inflation is "still too high" even though it has "passed its peak." Also, it will be "some time yet" before inflation falls back to target range. It explained, "this further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe".

Growth "has slowed" and labor market conditions "remain very tight" even though eased. Wages growth "has picked up" but is "still consistent with the inflation target". The path to soft landing "remains a narrow one" and a "significant source" of uncertainty continues to be household consumption.

AUD/NZD breaks structural resistance after RBA hike

AUD/NZD surges after RBA's surprised rate hike and breaks through 1.0928 structural resistance. The development should confirm that corrective fall from 1.1085 has completed with three waves down to 1.0556.

Intraday bias is now on the upside as long as 1.0881 minor support holds. Sustained trading above 1.0928 could prompt upside acceleration 1.1085 resistance. Break there will resume whole rally from 1.0469 (2022 low) to 100% projection of 1.0469 to 1.1085 from 1.0556 at 1.1172.

Looking ahead

Germany factor orders, UK PMI construction, Eurozone retail sales will be released in European session. Later in the day, Canada will publish building permits and Ivey PMI.

EUR/AUD Daily Outlook

EUR/AUD's decline continues today and break of 1.6134 support confirms resumption of whole fall from 1.6785. Intraday bias stays on the downside for 100% projection of 1.6785 to 1.6134 from 1.6513 at 1.5862. On the upside, above 1.6207 minor resistance will turn intraday bias neutral first. But risk will stay on the downside as long as 1.6513 resistance holds, in case of recovery. RBA Shoots up Aussie, Dollar Consolidating Against Europeans and Yen_4

RBA Shoots up Aussie, Dollar Consolidating Against Europeans and Yen_4

In the bigger picture, a medium term top is possibly in place at 1.6785 already, on bearish divergence condition in D MACD. Fall from there is seen as correcting whole up trend from 1.4281 (2022 low). Deeper decline is expected as long as 1.6513 resistance holds, to 38.2% retracement of 1.4281 to 1.6785 at 1.5828. Strong support could be seen there to complete the first leg of the corrective pattern.

Source: ActionForex.com

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Warren Takunda

Economic

Political

Des Moines, Iowa - In a surprising turn of events, former Vice President Mike Pence has formally announced his candidacy for the 2024 presidential race, setting the stage for a high-stakes showdown with his former boss, Donald Trump. Pence's decision to challenge Trump's bid for a second term has sparked intense speculation and raised questions about the future of the Republican Party.

Pence, who served as Vice President under the Trump administration, filed the necessary paperwork with the Federal Election Commission on Monday, solidifying his entry into the race¹. This move signals his intention to pursue the Republican nomination and presents a direct challenge to Trump's hold on the party.

According to sources close to Pence, he is expected to personally launch his campaign on Wednesday in Des Moines, Iowa, a strategic choice to kickstart his bid for the presidency⁴. Iowa holds the first-in-the-nation caucuses, making it a critical battleground for candidates seeking to build early momentum and secure crucial support.

The announcement of Pence's candidacy comes as no surprise to political observers who have closely followed his trajectory since leaving office. While serving as Vice President, Pence was widely seen as a loyal ally to Trump, often providing a calming and measured presence to counterbalance the former President's more controversial statements and actions.

However, as the 2024 race began to take shape, Pence's relationship with Trump became more strained. Reports suggest that the rift between the two escalated following the storming of the Capitol on January 6, 2021, with Pence facing immense pressure from Trump to overturn the election results. Pence's refusal to comply with Trump's demands led to a noticeable deterioration in their once-close bond.

Pence's decision to challenge a sitting President from his own party is a bold move that underscores the growing divisions within the Republican Party. Trump, who has maintained a strong grip on the party's base, wasted no time in announcing his intention to seek re-election, setting the stage for an intriguing battle between the two figures².

The upcoming clash between Pence and Trump is likely to have significant implications for the Republican Party's future direction and the broader political landscape. It remains to be seen how other Republican contenders will position themselves in the face of this high-profile confrontation. Will they align with Pence, attempt to rally behind Trump, or carve out their own paths?

The financial markets will undoubtedly keep a close eye on this contest as it unfolds. The outcome of the 2024 presidential race will have far-reaching consequences for various sectors, including energy, healthcare, infrastructure, and taxation, among others. Investors will carefully evaluate the policy proposals put forth by both candidates and consider the potential impact on industries and markets.

As the race for the Republican nomination gains momentum, the spotlight will be on Mike Pence and Donald Trump, two influential figures who will vie for control of the party's future. Their clash will test the loyalty of Republican voters and reshape the dynamics of the 2024 presidential race.

Only time will tell how this showdown will ultimately unfold, but one thing is certain: the battle for the Republican nomination is set to be a closely watched and pivotal moment in American politics.

To stay updated on all economic events of today, please check out our Economic calendar

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Devin

Stocks

Commodity

European markets got off to a negative start to the week as the effects of the Friday U.S. employment report rebound were tempered by a disappointing ISM services report which painted a contrastingly different picture of the U.S. economy.

The weekend Saudi Arabia oil production cut, which ordinarily should have prompted a sharp upwards move in oil prices initially saw prices move to one-month highs, however most of the gains quickly disappeared on concerns over the demand outlook.

U.S. markets initially got off to a reasonably positive start but the disappointment over the May ISM services report tempered gains, as well as prompting a sharp reversal in yields which had been higher in the lead-up to yesterday's 3pm data drop.

The weak nature of the ISM services report was in sharp contrast to other service sector numbers, raising more questions, than answers about the strength of the U.S. economy, ahead of next week's Fed meeting.

While the S&P500 managed to put in a fresh 9-month high the index finished the session slightly lower, as did the Nasdaq 100 after Apple shares which had initially posted a new record high, rolled out into the close after the first day of the WWDC got underway.

The unveiling of the new Vision Pro Headset was the centrepiece of a host of product and software upgrades. The Vision Pro will allow users to view content in virtual and mixed reality, with Disney+ signing a deal with Apple to stream its content by way of the headset, with a total price tag of $3,499. The headset looks a little like a pair of ski goggles or scuba mask, with initial impressions seeing the shares rollover into the close to finish lower.

With U.S. central bank officials now muzzled until after next week's rate decision markets now must reassess whether we do see a pause next week, or whether we see another 25bps hike. The odds still favour a pause even more so after yesterday's ISM report, however we still have next week's CPI numbers to contend with.

Earlier today we saw the RBA kick off an important two weeks for central bank rate decisions by raising rates by 25bps taking the headline rate to 4.10%. Today's decision could have gone either way, but in the past few weeks there has been a sea change in Australia when it comes to how the RBA is viewed as well as its competence.

Last month the RBA surprised the markets by unexpectedly hiking the cash rate by 25bps to 3.85%. Only days before that decision the RBA had been heavily criticised for being too slow in spotting the inflation surge seen at the end of 2021, and through 2022.

This criticism appears to have stung, and now the hawkish turn we're currently raises the prospect the central bank could possibly overcompensate in the opposite direction. This runs the risk of them tightening too hard and unsettling the housing market That said the headline rate in Australia remains well below its immediate peer the RBNZ where it sits at 5.5%, so the RBA still has plenty of room to catch up.

Today's European market session is set to see EU retail sales for April which are predicted to see a modest improvement of 0.2% after the sharp -1.2% decline in March.

Before that we have German factory orders for April, with the hope that after an awful March number of -10.7% and an economy in recession that Q2 will get off to a positive start with a gain of 2.8%.

EUR/USD – the failure at the 1.0780 area last week has seen the euro slip back, still within a tight range, with support back at the recent lows at 1.0635. We need to see a break of this range with broader resistance at the 1.0820/30 level.

GBP/USD – after slipping back the 1.2540 area last week we remain in a broader uptrend with support at the 1.2300 area and trend line resistance from the 2021 highs at 1.2630. This, along with the May highs at 1.2680 is a key barrier for a move towards the 1.3000 area.

EUR/GBP – found support at the 0.8560 level last week, just above the December 2022 lows at 0.8558. Is currently squeezing higher with the next resistance now at the 0.8660 area. We also have major resistance at the 0.8720 area.

USD/JPY – rebounded back towards last week's highs at the 140.95 area, falling short and slipping back below the 140.00 area. Is the U.S. dollar trying to carve out a top? We have support at the 138.40 area which if broken could see a move back to the 137.00 area.

Source: CMC

Today's European market session is set to see EU retail sales for April which are predicted to see a modest improvement of 0.2% after the sharp -1.2% decline in March.

Before that we have German factory orders for April, with the hope that after an awful March number of -10.7% and an economy in recession that Q2 will get off to a positive start with a gain of 2.8%.

Source: CMC

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Warren Takunda

Traders' Opinions

Istanbul, Turkey - The Turkish lira, the nation's currency, has extended its downward trajectory, hitting a new all-time low against the US dollar at over 21 lira per USD. This decline comes amidst a backdrop of uncertainty as investors eagerly anticipate insights into Turkey's economic policies following President Erdogan's recent re-election for a third term and the unveiling of his new cabinet. Despite the appointment of Mehmet Simsek, a pro-market advocate, hopes for a reversal of the unconventional policies that had resulted in soaring inflation, low interest rates, a plummeting lira, and negative net foreign exchange reserves remain tentative.

Turkish Lira's Downward Trend Persists Despite Cabinet Changes_1

Addressing the concerns of market participants, Simsek acknowledged the urgent need for a return to a "rational ground" to restore predictability to the Turkish economy. The new Finance Minister emphasized the importance of adopting a more orthodox approach to address the prevailing challenges. However, traders and investors are anxiously awaiting further details on the specific measures that will be implemented to guide Turkey's economic trajectory.

Inflation in Turkey, on the other hand, has shown signs of abating for the seventh consecutive month, marking its lowest level since December 2021. However, economists caution that this decline can be partially attributed to the pre-election promise of providing unlimited free natural gas to all households for a year. As the impact of this temporary measure fades, the underlying inflationary pressures that have plagued the Turkish economy will likely regain prominence.

The Turkish economy has faced significant headwinds in recent years, with high inflation eroding purchasing power and unsettling foreign investors. The previous administration's policies of suppressing interest rates and favoring fiscal expansion over orthodox economic principles contributed to the erosion of market confidence. As a result, the Turkish lira has experienced substantial depreciation, heightening concerns over the nation's economic stability.

While the cabinet changes, including the appointment of Simsek, indicate a potential shift towards more market-friendly policies, investors remain cautious, yearning for greater clarity on the government's roadmap for economic reform. International market observers and domestic stakeholders are keenly monitoring the upcoming policy announcements, hoping for concrete steps to address the pressing economic challenges and restore confidence in the Turkish economy.

As the Turkish lira continues to face downward pressure, market participants and citizens alike are anxiously awaiting comprehensive reforms that prioritize stability, encourage foreign investment, and provide a robust framework for sustainable economic growth. The forthcoming period will be critical in determining Turkey's economic path and its ability to regain the confidence of both domestic and international investors.

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