Oil Production Surges

In comments yesterday, Saudi Arabian Oil Minister al-Naimi noted that the nation would maintain oil output at near record highs, temporarily sending oil prices lower before rebounding modestly. The latest gains in production coupled with additional production coming online from Iraq and Libya are seeing OPEC output continue to rise beyond quotas set by the cartel. American production has not waned as much as previously thought, only falling by 20,000 barrels last week despite the continued drop in the drill rig count. Production is forecast to fall in the United States according to the latest EIA predictions however, Bakken tight oil could actually grow to a new record as drillers are incentivized to complete wells within one year for tax benefits. Pressure on prices continues to be offset by building long speculative positions. The spread between WTI and Brent has closed to just over $5.50 and could close further as production ramps higher.

The dollar gained ground against peers as the absence of economic data and remarks from New York Federal Reserve President Bill Dudley sent the currency higher. Responding to questions about the impact on emerging markets of any rate increases, Dudley confirmed the Federal Reserve’s outlook for raising rates in 2015 while stating that the Fed would seek to moderate any increase to avoid turmoil or liquidity disruptions.   Further to the point, hidden towards the end of his explanations was a statement that interest rates will be approximately 3.50% by the time inflation returns to the long-term target of 2.00%. Even though the Fed’s projected trajectory is 1.875% by the end of 2016, economists and market participants are expecting interest rates at half that level. The rally in the dollar saw precious metals resume their slide lower, with gold falling back below the key $1200 level and silver completing the right shoulder of the technical pattern.