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Saudis Implement OPEC Deal Cuts

Daily Analysis - 06/01/2017

Concerns About Output Cut Compliance Dismissed as Saudi Arabia Fulfills Pledge

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Amid comments of noncompliance, Saudi Arabia reported that the country has already cut output to honor its pledge made during November.  Production was reduced by nearly 500,000 barrels to 10.058 million per day as the country works with other major producers to end the supply imbalance that has threatened another rout in oil prices.

Saudi Arabia Quells Deal Participation Concerns


In spite of earlier reports on Thursday indicating that Saudi Arabia had not stuck by its commitment to reduce oil output in a bid to help rebalance the oil market, confirmation from the Wall Street Journal reaffirmed the nation’s vow to cut production.  Although output has been cut to 10.058 million barrels per day, some of these reductions have been offset by rising US production which was at 8.770 million barrels per day as of last week.

However, the same report from the Energy Information Administration released on Thursday also showed that the Department of Energy had been underestimating production in October, with daily production likely at 8.800 million barrels per day versus the 8.500 million reported.

While a massive 7.051 million barrel reduction in stockpiles was announced for last week, inventories remain 35% higher than the 5-year seasonal average, helping keep a lid on upside in crude oil prices.

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Fed Striking an Increasing Hawkish Tone


President John Williams of the Federal Reserve Bank of San Francisco remarked that three interest-rate increases in 2017 is a “reasonable” calculation. In an interview on Thursday, Williams told CNBC, “The central tendency of the views of my colleagues -- around three rate hikes -- that’s, I think, a very reasonable view.”

Promised infrastructure spending and tax cuts could help to spark faster inflation and merit a steeper pace of rate hikes than would otherwise be needed to keep inflation near the Fed’s 2.00% goal.

In the meantime, there are growing signs that slack in the labor market is fading following the ADP nonfarm employment report which showed 153,000 new private sector jobs versus 170,000 forecast.  After a multi-session climb, silver prices are sliding once more as the dollar rebounds from recent weakness.

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Australia Posts Surplus in November


As rising global commodity prices helped power exports, Australia posted its first monthly trade surplus since early 2014 in November, indicating the potential for a modest rebound after the economy contracted during the third-quarter. Powering the enhanced trade performance was an upward surge in iron-ore and coal prices that has aided commodity exporters from across the globe.

The seasonally adjusted surplus of AUD$1.24 billion in November astonished economists who had forecast a deficit of AUD$550 million. The figures released by the Australian Bureau of Statistics showed an 8.00% surge in exports from the previous month, compared with a deficit of AUD$1.12 billion in October.

While the recovery in Australia’s exports shows some positive prospects for growth, an absence of significant movement in the Australian dollar suggests that investors may be cautious on how one month’s trade performance may help the economy.

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German Factory Orders Slump By Most in 2-Years


In a stunning reversal from the positive fundamental developments reported earlier in the week, German industrial orders shrank by -2.50% during the month of November, missing expectations of -2.30% after printing at 5.00% during October.

Besides marking the fastest pace of decline in the indicator since November of 2014, both external and domestic orders fell, sliding -2.30% and -2.80% respectively.  While demand for consumer goods was on the rise, capital goods was the predominant drag after falling by -4.80% on a month over month basis.  Aside from the expected drop in factory orders, retail sales experienced a deeper than anticipated contraction during November, falling by -1.80% after a steep climb in October.

DAX futures are mostly unchanged, trending between gains on losses on the day after rising modestly during Thursday’s trading session.

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