Market Report & Analysis for 6/27/2018 Morning Edition
Morning Market Overview
As suggested Monday we thought the gains in oil prices were overdone considering the fact that OPEC is increasing production and not cutting it again. Tuesday the market was hit with a round of profit taking selling with even the spot WTI contract succumbing to selling mid-day sending it into negative territory to join the rest of the complex. By the end of the day the selling subsided allowing the complex to settle off its intraday lows.
The market is still digesting the implications of the nominal 1 million bpd increase in oil production with many questions still unanswered. For example, how soon will the increases reach 1 million bpd? Saudi Arabia said they are prepared to increase production quickly and strongly as of the start date of July 1. How quickly will the rest of the producers increase production? Russia said they would increase production during the second half of the year suggesting it may not be as quick as Saudi Arabia. Other questions are focused on the risk side of the equation. When and will Iranian production be impacted by US sanctions? Will the fighting continue in Libya? Will Venezuela’s economy continue to spiral out of control? These and others could result in further decreases in production offsetting a portion of the 1 million bpd potential increases in production. We view the current modification to the 2016 production cutting agreement as neutral to slightly bearish at least for the next several months.
The deal puts a cap on prices which we expect will result in the spot Brent contract trading in a range of $65 to $75/bbl while the spot WTI contract will likely trade between $60 to $70/bbl barring any unforeseen additional geopolitical events cropping up. The externals were mixed yesterday with a larger negative impact coming from a strong move to the downside in most all equity markets around the world as concerns over trade wars are clouding all asset markets. The US dollar was lower providing a bit of support for oil prices but not enough to offset the negativity coming from a steep decline in global equities.
On the financial front global equity markets were mostly lower as market players remain uneasy over all the US and China tariff discussions.
The EMI Index was lower with losses in nine of the ten bourses in the Index. The EMI Index was lower by 0.71 percent on the day with the year to date loss at 4.1 percent. Only one of the ten bourses in the Index are still in positive territory for 2018 with China still in the worst performing spot in the Index with Australia in the top spot with a 4 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 is lower on the day with the Yen/USD and the Euro/USD higher. Overall the currency markets were a positive price driver for the oil complex.
