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Crude Oil Breaks Key Levels

Weakness in Energy Prices Prevails Following the OPEC Non-Decision

Key energy benchmarks retreated further in the prior week, breaking down to new multi-year lows as resurgent inventory concerns weighed on prices. With both WTI and Brent below $40 per barrel, concerns are mounting that marginal producers will be forced to exit from production as prices fall well-below break even levels.

Weekly Review

The prior week saw the majority of market momentum emanating from the latest OPEC decision an announcement of suspension of output targets following indications that the group was producing well above existing quotas. The sharp uptick in crude oil production combined with near-record inventory levels for this time of year has added to mounting pressure on key oil benchmarks. Prices hit new multi-year lows last seen in 2009 on the back of increased selling interest amongst investors heading into the end of the year. With conditions unlikely to improve vis-à-vis production, the outlook remains gloomy for key energy benchmarks including natural gas. Aside from continued commodity deflation, the Reserve Bank of New Zealand opted to reduce interest rates to 2.50%, reiterating that conditions remain stable despite risks to the outlook on the back of weaker dairy prices and softer demand. In China, the trade surplus dipped sharply even though imports managed to rebound substantially while exports remain in contractionary territory. Producer prices however remained weak, contracting for 45-straight months in a growing sign that more stimulus might be just around the corner.

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The Week Ahead

The upcoming sessions are likely to prove a pivotal moment for financial markets as investors prepare for the Federal Reserve decision. The FOMC Meeting begins on Tuesday, culminating in Wednesday’s interest rate announcement and subsequent press conference from Federal Reserve Chair Janet Yellen. Rates are currently expected to increase 25 basis points to 0.50% in the first rate hike in years. Should the US enter a tightening cycle, it could mean a sharp turnaround in the dollar going into the end of the year following the moves by other Central Bankers to keep monetary policy unchanged. Leading up to the decision there is a CPI reading due from the United States as well. Across the Atlantic, Euro Area CPI figures for November are due with forecasts currently showing no expected change for the annualized headline figure. Inflation numbers are also set to be released by the United Kingdom with estimates showing the nation jumping back into inflationary territory. Other important indicators include the GDP reading from New Zealand and the latest updates on the German economic outlook from the ZEW economic sentiment figure.

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