Oil Prices Drops to 7-Month Lows

Daily Analysis - 21/06/2017

Crude Futures Fall Back Into Bear Market Territory


Although no specific catalyst has been attributed to the most recent decline, oil futures fell to multi-month lows on Tuesday following a burst of selling activity.  An advance inventory reading from API delivered late in the session indicated another drawdown in crude oil stockpiles while the amount of distillates and refined products grew last week.

Problematic Backdrop Keeps Oil Prices Under Pressure

Oil futures slid over 2.00% on Tuesday before staging a modest recovery after mystery selling pressure emerged ahead of the American equity market open.  While no particular event was credited for the drop, rising production in Libya combined with the prospect of growing distillate inventories in the United States may continue to weigh on prices for the near-term.

US oil output hit a new cycle high last week, echoing the 22-weeks of gains in the drill rig count reported by Baker Hughes last week.  As such, the glut could conceivably deepen, especially if demand for refined products fails to experience a pickup.  Data from the American Petroleum Institute announced late in the session on Tuesday did show a decline in oil inventories, but nevertheless highlighted the growth in gasoline and distillate stockpiles.  Brent futures entered a bear market on Tuesday, with prices erasing earlier gains to trend just above $45.50 per barrel.


Pound Falls to 9-Week Low After Carney Comments

The Pound slipped against major peers on Tuesday, notably the US dollar after Bank of England Governor Mark Carney presented his delayed Mansion House speech.  The main takeaway from the remarks was the indication that interest rates were not set to rise imminently due to the general lack of stability with respect to the outlook.

The risks associated with Brexit were also presented, but overshadowed to a large degree by comments on inflation and wages.  Even though last week’s interest rate decision highlighted the divisions within the Monetary Policy Committee after three members cast dissenting votes, the UK economy is not yet prepared to handle higher borrowing costs according to Carney.  The result was a steep selloff in the Pound, with GBPUSD slipping back towards Tuesday’s low of 1.2603.


Dollar Gains Despite Housing Concerns Expressed by Fed Vice Chair

During prepared remarks presented on Tuesday in Amsterdam, Federal Reserve Vice Chairman Stanley Fischer cited record low interest rates as the primary driver of high housing prices in several important regions across the globe.  Although he refrained from commenting on monetary policy during his speech, Fischer stressed the increased strength of the financial system and efforts undertaken to improve lending standards.

However, there are growing concerns that elevated housing prices might be symptomatic of problems yet to unfold.   With housing data in the form of existing home sales on deck for release later ahead of the American equity session, forthcoming data may mirror recent disappointments in other key data points like building permits and housing starts.  Despite housing risks, the US dollar has extended its most recent winning streak, with USDCAD edging back towards 1.3300.


Ruble Reaches Lowest Point Against US Dollar Since February

The gradual loosening of monetary policy over the last few months is taking its toll on the Russian Ruble as evidenced by the latest price action.  With more easing of interest rates expected for the remainder of the year amid the rapid slide in inflationary pressures, the Ruble may find itself under considerable pressure looking ahead, especially if the current US dollar rebound remains intact.  Adding to the potential downside risks is new legislation from the US Legislature aimed at increasing sanctions.

After passing the Senate by a vote of 98-2, the House of Representatives scuttled the Senate sanctions bill after constitutional issues were raised with the substance of the bill.  Nevertheless, any new sanctions will likely be shrugged off as Russian growth is gradually restored.  After reaching the highest point since February, USDRUB is continuing the march higher with the pair retaking 60.0000 earlier.


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