OPEC Announcement Disappoints

Daily Analysis - 26/05/2017

US Crude Futures Dip Back Below $50 After Deal Extension Fails to Improve Sentiment

After retaking the $50.00 per barrel level amid speculation that OPEC would agree to output cut extensions, US crude oil prices tumbled on Thursday, slipping back beneath the key psychological mark. The sentiment turned outright bearish after the Organization of Petroleum Exporting Countries disappointed investors, who were hoping for larger cuts over a longer period of time.

Bears Retake Control of Oil Futures

Amid significant speculation, OPEC agreed on Thursday to extend production cuts of 1.800 million barrels per day for an additional 9-months past the original agreement. Though the move had been expected, most oil investors were hoping that producers would agree on deeper or longer cuts to ease the global supply glut.

More than 20 OPEC and non-OPEC member states had decided late last year to collective slash production to help offset the ongoing supply imbalance. However, the deal did not immediately affect global inventories, especially amid sluggish demand growth.

Nevertheless, the impact has become more visible over the past two months, with US crude stockpiles falling for the seventh week in a row.

In the meantime, US crude futures have broken below the strong support at $50.00, and were last seen around $49.20 per barrel.

US Unemployment Claims Rise

The number of US citizens filing for jobless benefits edged modestly higher last week, with the four-week moving average hitting a 44-year low, indicating further tightening in the labour market which should encourage the Federal Reserve to hike interest rates next month.

Initial claims for state benefits gained 1,000 to a seasonally adjusted 234,000 during the week ended May 20th according to data compiled by the Labor Department. The increase came on the back of three consecutive weeks of declines, but managed to stay below economist forecasts of jobless benefits nudging upwards to 238,000.

This latest sign of strength in the economy was however somewhat offset by other data released Thursday that showed the April goods trade deficit widening alongside worsening housing fundamentals reported earlier in the week.

Following a brief tumble on the 17^th, Nasdaq futures managed to reach a new record high of 5795 during yesterday’s session.

Pound Falls on UK GDP Revision

Sterling slipped against most major currencies on Thursday after data showed the UK economy slowed more than previously reported during the first quarter.

GDP grew by a mere 0.20% versus an earlier estimate of 0.30%. Economists surveyed by Reuters had projected the quarterly rate to stay unchanged for the first three months of 2017.

On an annualized basis, the economy expanded by 2.00% compared to the 2.10% previously estimated. The revision lower was primarily due to weaker consumer spending, spurred by rising prices and tepid wage growth, which are squeezing household budgets.

The Pound fell to 1.2980 against the Dollar following the announcement after hitting a session high of 1.3012. GBPUSD is continuing to trend lower on Friday, and was last seen around the 1.2875-mark.

Japanese Inflation Edges Higher

In a sustained reversal from the deflationary environment that ruled Japanese fundamentals for years, core consumer prices increased for a fourth straight month in April, the longest streak of gains since middle of 2015 amid rising energy costs.

On a year-on-year basis, core consumer prices rose 0.30% in April. However, on a headline basis, the increase was largely on account of the fading effect of last year's oil price slide.

Considering the gains from higher energy prices are likely to ebb during the second half of the year, inflation is likely to settle at levels far below the Bank of Japan’s 2.00% target.

Excluding the effect of volatile items like fresh food and energy, consumer prices remained unchanged last month from a year ago.

After climbing to a one year high on Thursday, EURJPY is down in early Friday trade around 124.850.