Crude Rallies as Saudis Promise Deeper Cuts

Daily Analysis - 12/12/2016

Oil Prices Hit Highest Point Since July 2015 as non-OPEC Members Join Output Cap

In a surprising move over the weekend, non-OPEC countries agreed to move forward with a deal to limit output, helping to work towards ending the ongoing supply glut and putting a floor in oil prices. Additionally, upside momentum in crude oil prices was bolstered by the revelation that Saudi Arabia plans to cut production deeper than originally agreed upon.

Saudi Arabia Signals Greater Willingness to Cut

Saudi Oil Minister Khalid al-Falih indicated that Saudi Arabia was preparing to cut production below the key psychological level of 10.000 million barrels per day, helping to drive Brent and WTI futures to the highest points in over a year. Following the announcement that non-OPEC countries would join OPEC in reducing production by approximately 558,000 barrels per day starting in 2017, there are growing indications that prices may have finally found a floor. If the parties are able to stick to the agreement and not defect by producing more during a period of higher prices, the moves may lead to a significant rebalancing of the energy market. Countries that plan to partake in the newly announced deal include Russia, Mexico, Oman, Azerbaijan, and even Kazakhstan. In the meantime, WTI futures for January delivery have pushed above $54.00 per barrel.

US Consumers Positive on Trump

Data reported on Friday by the University of Michigan relating to consumer sentiment showed that consumers are the most confident they have been in almost two years on the back of Donald Trump’s proposed fiscal spending measures. Besides sentiment reading at the highest point since January of 2015, the figures highlight that consumers feel increasingly comfortable, with current economic conditions rising to 112.1 from 107.3, marking the best print since July of 2005. Adding to the optimism was speculation that prices will continue to rise, with American’s surveyed anticipating consumer inflation of 2.30% during 2017. However, there are many concerns leading up to the inauguration, namely Trump’s proposed cabinet picks, especially for Secretary of State after the selection of Exxon Mobil CEO Rex Tillerson. Gold prices are now trading at the lowest levels since February as the resurgent dollar reduces demand for haven assets.

Turkish GDP Collapses

For the first time since 2009, the Turkish economy has contracted, with gross domestic product shrinking by -1.80% during the third quarter compared to a year earlier. Much of the losses were associated with falling consumer spending and an ongoing trade deficit. Even with the Turkish Lira continuing to tumble against peers, exports fell by -7.00% during the quarter whereas imports grew by 4.30% during the same period, exacerbating the deficit. While rising government spending was able to rescue the GDP figure from an even deeper plummet, business activity in the country continues to fade with both services and industrial activity declining. Considering the most recent spate of terrorist attacks, it is unlikely that tourism will be able to rescue the economy either. After reaching a record high earlier in the month, USDTRY is once again on the rise, closing in on all-time highs.

Japanese Producer Prices Remain in Deflation

Although Japanese institutions are making progress in the fight against low growth and deflation, the latest producer price index figures paint a different picture. Despite rising to the highest level in months, the annualized headline PPI figure remains in deflationary territory at -2.20%, falling now for 20-straight months. It was the best print since May of 2015, helped in part by the monthly figure climbing by 0.40%, beating expectations of 0.30% growth and the prior month’s -0.10% contraction. Weakness in the Yen over the medium-term could help spur additional upside in the figure, pushing producer prices back into positive territory as devaluation raises the prices of imported products. Furthermore, positive producer prices will eventually translate to gains in consumer prices, helping to fight ongoing deflation. In the meantime, USDJPY continues to climb, with the pair reaching its highest point since February.