Quota Talks Send Oil Higher

Daily Analysis - 22/11/2016

Crude Prices Rise to Heights Last Seen in October on Output Limit Optimism


Crude oil prices reached 3-week highs in early Tuesday trade as negotiations to limit oil output from OPEC and non-OPEC nations hit a fever pitch.  With the upcoming meeting in Vienna rapidly approaching, much hangs in the balance ahead of the November 30th decision.

Output Limit Speculation Stokes Price Gains

Although there are still risks that lie ahead, the prevailing confidence that a deal to limit oil output will be reached has been enough to push Brent crude oil futures to the highest point since October 31st.  Rumors that Iran and Russia are onboard with measures designed to reduce or limit production have been enough to spur a sustained rally in prices, with Brent rising approximately 12.50% off of last week’s lows.  Nevertheless, despite the high level of optimism heading into the Vienna OPEC meeting, there are still several unknowns that could shift sentiment.  The main roadblock to any deal remains an enforcement mechanism to verify quotas are not being exceeded.  Without a way to resolve this critical issue, the rally higher in prices may quickly crash lower.


Turkish Purge Continues

In a sign that President Recep Tayyip Erdogan is not yet finished consolidating his grip on power in Turkey, another 15,000 civil servants, military and security personnel have been dismissed due to ties to the failed coup attempt.  This dovetails on the removal of approximately 110,000 individuals from their positions after the attempted government takeover fell apart.  Although inflation has improved across the country, the one area of concern is rising joblessness, with August unemployment printing at a 19-month high of 11.30%.  The economy is still reeling amid tepid foreign investment, falling tourism, and concerns about the impact of terrorism, especially when considering the greater intervention in the Syrian military theater.  While USDTRY is slightly lower after reaching a new record high on Friday, the correction is likely to be short-lived, paving the way for further gains in the pair.


Trans-Pacific Partnership Falling Apart

In another sign that the famed TPP trade deal is on its last legs, Japanese Prime Minister Shinzo Abe called the trade pact “meaningless” without the participation of the United States. With President-elect Donald Trump promising to pull out of any deal on the first day he enters office, parties are increasingly looking towards the emerging pact being forged by China.  China’s greater role in shaping a regional trade deal is likely drawing the ire of Japan, especially when considering the prolonged spat over territorial rights.  In other news, a magnitude 7.4 earthquake struck northern Japan on Monday, raising fears about another tsunami and the impact on Fukushima.  The Yen was largely unresponsive to the development, with USDJPY flat on Tuesday after the tsunami alert was lifted.


Dow Futures Reach New Record

Following a brief retreat after the weekly reopening, Dow futures are back on the climb, closing at a new record on Monday and rising to a new intraday high during Tuesday trade.  Trump’s plans to roll back regulations and promises to invest in infrastructure have spurred gains in the financial, industrial, and health care sectors.  Although Republicans are interested in reinstating the debt ceiling, potentially hobbling Trump’s ambitious fiscal plans, there are signs that Trump is prepared to use executive orders to pass his agenda within the early days after inauguration.  In the meantime, market participants are increasingly concerned about the high valuation of stocks and the potential asset rotation that may result if the Federal Reserve raises rates during December.  As such, the increasingly overbought feel of stocks might be setting up key benchmarks for a reversal.


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