Crude Oil Edges Higher on OPEC Chatter

Daily Analysis - 21/03/2017

Oil Cartel Considering Extending Output Cuts

Crude oil prices rose on Tuesday amidst expectations that the OPEC-led output cut deal to curb the supply glut could be extended past its initial 6-month horizon. However, non-compliance from certain parties such as Russia and Iraq could derail those plans if left unchecked for the coming months.

Oil Futures Bounce Off Four Month Lows

OPEC’s pledge to slash its output by close to 1.8 million barrels a day until June to boost prices that have remained depressed for over two years has so far experienced record compliance from cartel members. However, the production cuts have failed to yield the desired effect as the US continues to ramp up production, more than offsetting the OPEC efforts.

Crude prices have tumbled over -10.00% since the beginning of the year, and more and more OPEC members are now favouring extending the output deal beyond June to stabilize the market. Nevertheless, to reassure markets, OPEC sources remarked that the cartel’s increased support for extending oil supply must be complemented by non-OPEC participation. Front month Brent crude futures bounced off the four-month low near the $50.00 per barrel hit last week, with prices currently hovering just below the $52.00-mark.

Chicago Fed National Activity Tops Forecasts

The US Chicago Federal Reserve National Activity Index rose to seasonally adjusted 0.34 in February from the upwardly revised -0.02 in January, easily topping market expectations of 0.03. The much more closely-tracked three-month moving average improved from 0.07 in January to 0.25 in February – the highest since December of 2014. Employment-linked indicators contributed 0.21 to last month’s reading, up from 0.06 the month before. Production-related indicators improved from 0.04 to 0.09, while personal consumption contributed 0.03, above January's -0.11.

Helping market sentiment were comments from Chicago Fed President Charles Evans, who remarked that the US Federal Reserve will likely wait until June to decide whether to raise rates again. S&P 500 futures have been stuck in a narrow trading range since the beginning of March, with the benchmark index last seen trading around 2370 after falling the last two sessions.

Australia Home Prices End 2016 on a High Note

Residential property prices across Australia surged 4.10% on a quarter-over-quarter basis for the three months ending December 31, 2016, following the 1.50% gain recorded in the third quarter. On a year-on-year basis, home prices jumped by 7.70%, compared to the 3.50% climb reported during the prior period. According to data from the Australian Bureau of Statistics, Sydney and Melbourne led the growth with home prices increasing by 6.10% and 6.00% respectively.

Residential property auction clearance rates have been rebounding over the past several months amid strong demand from buyers looking to capitalize on record low interest rates. This demand has managed to remain strong despite banks tightening their lending criteria for property investors after coming under pressure from the Australian banking regulator. AUDUSD is dipping in early Tuesday trade, with the pair currently trading close to 0.7705.

Russian Producer Prices Rise

In yet another sign of the resurgence in Russian economic activity over the last year, producer prices soared by 15.10% year-over-year through February, following the 12.70% gain a month earlier. This was the highest producer inflation print since October of 2011. On a monthly basis, producer prices edged up by 0.80%, compared to the 3.30% percent gain in January. Spiraling mining costs, which surged from the 25.20% pace in January to 48.70% last month, was the predominant contributor to higher producer prices. Prices however increased at a slower rate for manufacturing (8.70% from 10.40%) and electricity, gas and water supply (4.50% from 5.80%).

However, this upbeat reading is unlikely to build the case for lower rates during the upcoming monetary policy decision on Friday. USDRUB remains in a strong downward trend, and is currently sitting just above important support around 56.5400, with any break below potentially accelerating the decline.