OPEC Deal Announced

Daily Analysis - 01/12/2016

Organization of Petroleum Exporting Countries Pledges To Reduce Production

After much fanfare alongside widespread concerns that a deal would fail to materialize, OPEC managed to cobble together a deal to cut 1.200 million barrels of production, bringing the group’s total output to 32.500 million barrels per day. Adding to the optimism is news that Russia will join in capping output in an effort to help restore balance to the vastly oversupplied oil market.

Oil Soars As Output Deal Emerges

After a week fraught with concerns that the gaps between certain OPEC members were too wide to bridge, the news of a plan to cut 1.200 million barrels of production to help offset the ongoing supply imbalance was enough to send oil prices surging higher by near double digit rates. The deal, which is set to take effect January 1^st, sees the biggest cuts shouldered by Iraq and Saudi Arabia while Libya and Nigeria were granted exemptions. Adding to the optimism was news that Russia plans to participate by reducing output up to 300,000 barrels per day in the first half of 2017. To ensure compliance, Kuwait, Algeria, and Venezuela are set to monitor the deal to make sure quotas are not exceeded. WTI are currently flirting with the $50.00 level after failing to cross the level on Wednesday.

US Job Creation Picks Up

In another positive sign ahead of Friday’s nonfarm payroll figure from the Bureau of Labor Statistics, data from payroll processor ADP showed the US economy adding 216,000 jobs during November. Besides beating forecasts of 165,000, the print was well above October’s figure of 119,000. Aside from the positive numbers from the labor economy, PCE inflation remained relatively stable during the month of October, with the core PCE price steady at 1.70%. Personal income rose during the month, climbing by 0.60% on a monthly basis during October while spending took a surprising dip. The real concern was pending home sales which fell to 0.10% growth month over month as the possibility of higher interest rates and rising mortgage costs deters potential buyers. In the meantime, gains in the US dollar propelled gold prices to brand new lows overnight, falling as deep as $1162.19 before rebounding back above $1170.00.

Canadian GDP Rebounds

Mirroring the upward momentum in oil prices, the Canadian economy showed vast improvements over the last few months, with gross domestic product climbing by 0.30% during September. On an annualized basis, the results translate to a 3.50% annualized pace of growth for the economy, well exceeding the -1.30% contraction reported a quarter earlier. GDP expansion has now reached a two-year high of 0.90% during the third quarter, highlighting the ongoing fundamental recovery’s ferocity. Helped along by accommodative monetary and fiscal policy, the key drivers were a rebound in exports, namely from the oil and gas sector as the country recovers from wildfires that tore through the oil patch early in the summer. After trading mostly flat on Wednesday, positive momentum in oil prices is seeing the Canadian dollar appreciate versus the US dollar, pushing USDCAD back below 1.3400.

Chinese Manufacturing Activity Disappoints

For a day that will be largely defined by manufacturing figures from Europe and the United States, the latest data raises some concerns about how sustainable the gains really are. According to Caixin, the manufacturing purchasing managers’ index fell from 51.2 to 50.9 during November. While the official figure managed to beat estimates and the prior figure, policymakers are facing a multitude of problems including plunging commodity prices locally alongside rising capital outflows. Capital controls are expected to be tightened in order to plug the existing holes while the People’s Bank of China continues to intervene in FX markets. However, in order to keep the USDCNH from descending too rapidly, the costs are skyrocketing as the Central Bank burns through foreign currency reserves at a feverish pace. After four straight sessions of losses, Wednesday’s modest gains have once more turned to losses with USDCNH back on the retreat.