Market Report & Analysis for 5/31/2018 Morning Edition

Morning Market Overview

This morning we are seeing perhaps a dead-cat bounce to the upside across the complex. Yesterday was a risk off day for most asset classes as market participants came back from the long holiday weekend in the US with new worries brewing in Italy over who was going to govern and what the future will be for Italy in the EU.

This concern sent global equity market around the world in a strong downward spiral with money moving into US bonds sending the US ten-year Treasury note back below the 3 percent level along with the US dollar Index rising strongly. The externals were a strong negative for oil prices today.

Further adding to the negativity in the oil pits is the growing concern that Saudi Arabia and Russia are going to push for a production increase at the June 22 OPEC meeting in Vienna. The exact outcome is still an unknown with many different scenarios floating around the media airwaves projecting increases from as low as 300,000 bpd to over a million bpd. Irrespective of the details at this point the market sentiment has turned decidedly bearish for the short term as all the longs hear right now is a production increase. The magnitude does not matter as many traders view this decision as an event that will result in global inventories rebuilding and prices falling strongly. We think the market is currently overreacting and do not believe Saudi Arabia is going to throw away 18 months of high compliance to a production cutting accord that sent prices (Brent) as high as $80/bbl.

The outcome of the meeting will be very calculated as OPEC tries to balance what they have accomplished while not giving any further market share away from either Iran or Venezuela to US/non-participating producers. On the financial front global equity markets were strongly lower across the board on concerns over the financial and political situation evolving in Italy. The EMI Index was lower after a decline in US equities as well as most indices around the world. The EMI Index decreased 1.50 percent on the day with the year to date gain at 0.8 percent. Only four of the ten bourses in the Index are still in positive territory for 2018 with China still holding the worst performing spot in the Index with Brazil in the top spot with a 3.1 percent gain for the year.

The negative value direction in global equity markets was a negative price driver for the oil complex. On the currency front the US dollar Index was higher on the day with the Yen/USD and the Euro/USD mixed. Overall the currency markets were a negative price driver for the oil complex.