Article / 14 September 2016 at 8:10 GMT

From the Floor: IEA sends oil bulls running for cover

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  • IEA changes tack on oil to predict supply glut to last deep into 2017
  • Prognosis supports case that we will be in a $40-50/b range for longer — Hansen
  • Opec would need to cut supply by up to 750,000 b/d to shift balance — Hansen
  • Focus on Algiers meeting for September 26-28 sharpens
  • Equities rebound peters out as "environment still very fragile" — Garnry
  • Short position on Italy 40 index as equities continue to look weak — Garnry
  • One-month USDMXN spikes on the back of Clinton health issues — Bechmann
  • Overnight USDJPY ahead of Bank of Japan meeting slated for 43% — Bechmann

By Martin O'Rourke

Rein it in

Last week's oil rally surge beyond $50/barrel seems like a distant memory Wednesday morning and the International Energy Agency did little to dispel the gloom after predicting the supply glut will continue until well into 2017.

It's a 
change of tack for the IEA which has long been bullish on the return to normal conditions and backs up an Opec release earlier this week that said pretty much the same thing.

"The IEA had been one of the most bullish in terms of a return to a balanced market, but not anymore," says Ole Hansen, Saxo Bank's head of commodities strategy. "This means that the supply glut is going to stay until well into 2017 and that we are likely to be stuck in a $40-50/b range for longer."

Last week's surge was helped by a 12 million draw reported by API, but the latest inventory figure clawed back some 1.4 million barrels. With the more important EIA inventory stocks report out later today, analysts are slating a 2.8 million barrels rise (14.8 million-barrels draw last week) with a likely impact on oil and US benchmark WTI in particular to watch out for.

WTI can expect a turbulent ride today if the EIA report surprises
 Source: Bloomberg

"To get some kind of rebalancing, Opec would need to cut production by 500-750,000 b/d and with both Iran and Libya not yet at full capacity, this isn't going to happen," says Hansen. "It puts the focus squarely back on the big producers' meeting at Algiers on September 26-28."

WTI was at $45.15/b at 0655 GMT. Brent was at $47.10/b.

Equities hit

Equities were also feeling the heat overnight as the early-week rally (after Friday's carnage we should add) faded into oblivion vindicating Saxo Bank's head of equities Peter Garnry's terse comment Tuesday that "a very dangerous cocktail" continues to pervade the equities space.

"The rebound on Monday was broken and the current environment is still very fragile," says Garnry. "We've cut our long Japanese exposure and are moving into a neutral exposure position."

Garnry is initiating a position on the Italy40 Index "driving exposure to the short side," he says, pointing towards the European periphery as the weakest link in the chain and the severe stress already on the Italian financial system.

He says take profit at 15,500 and place a stop at 17,100.

The Italy40 Index since August 8 shows a sharp recent fall that could extend
 Source: SaxoTrader GO

Sick Hillary

Hillary Clinton's dizzy spell Sunday is already having reverberations through markets and one currency that is proving particularly averse to the ailing Democrat is Mexico's peso.

"One-month at-the-money USDMXN volatilities have been moving up quite a bit," says Kresten Bechmann from Copenhagen's FX Options desk. "The move is related to the spot move and that's been on the back of Trump catching up with Hillary."

"What it seems to indicate is that Mexico's peso really does not like the fact that Clinton is looking unhealthy."

One-month USDMXN vols rising since Clinton's dizzy turn
 Source: Bloomberg

Meanwhile, says Bechmann, overnight USDJPY vols prior to the Bank of Japan meeting on September 21 are slated to be at a whopping 43%. "That's pretty significant so keep an eye on that," says Bechmann.

And finally....

The general risk-off mode should normally support gold but with the odd equities and bond correlation pervading, the usual safe-haven precious metal is not getting a fillip from the overall environment.

"Hedge funds are holding a record long position in gold so if there is a general reduction scenario, then gold will be affected by this," says Hansen. "As long as both bonds and gold are being hurt, then gold will struggle too."

They keep on pumping and an out-of-kilter market is
expected to pervade until well into 2017. Photo: iStock

Martin O’Rourke is managing editor at

Editor’s note: From the Floor takes advantage of's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.


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