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From the Floor: Oil falters on Opec/Russia doubts — #SaxoStrats

   • Kiwi posts modest comeback on election news exhaustion
   • Production cut deal uncertain ahead of Thursday Opec summit
   • Higher oil prices lending a boost to US shale producers
   • Hang Seng index extends weakness on China reports
   • South African rand reverses north as traders look to ANC's future

By Michael McKenna

Oil prices are sliding marginally lower into today's European opening bell with Saxo Bank head of commodity strategy Ole Hansen commenting that "Opec is walking a tightrope" ahead of the cartel's Thursday summit in Vienna.

At the moment, the major concerns are related to whether Russia is committed to extending the price-supportive production cut/cap deal. After all, says Hansen, higher prices risk emboldening the US shale sector – rig counts are indeed on the rise – as well as potentially impacting demand from major importers such as the US and China.

"We saw hedge funds and money managers cut bullish bets to the week ending last Tuesday by 19,000 lots to 900,000 lots, or 900 million barrels," notes Saxo's commodities head, adding that a look at the swap position shows it to be at a record short.

"The question here is what happens if we see a period of long liquidation," says Hansen, adding "who is going to buy?"

In terms of this week's inventories report from the US Energy Information Administration due tomorrow, Hansen says it is likely to be broadly price-supportive due to the impact of Canadian supply disruptions [due to the Keystone oil spill in South Dakota].

Fund positioning and WTI swap chart:
Oil swap

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Source: Saxo Bank

In forex, Saxo Bank head of FX strategy John J Hardy points to an exhaustion of the kiwi-negative New Zealand elections narrative with NZD posting a modest bounce. In Saxo technical analyst Kim Cramer Larsson's view, NZDUSD resistance currently lies at 0.6980 but a rally could see prices extend to 0.7050 or even 0.71.

Beyond the kiwi, FX traders are seeing a surge in ZAR as traders look ahead to a potential ANC leadership change while the dollar remains in consolidation mode ahead of the core PCE inflation report Thursday. "The growing confidence that inflation will return is weighing on USD," says Hardy, who adds that the upcoming PCE release is thus an event risk if these expectations are confounded.

In stocks, Saxo Bank head of equities strategy Peter Garnry reports that the Hang Seng index is extending its weakness led by energy and financials. "Energy shares are tracking oil lower while financials have been disrupted by reports of an upcoming North Korean missile launch".

"The index looks weak, having broken below the key short-term 29,600 level," says Garnry, "and the downturn is supported by news that China may be set to limit investor flow."

In single shares, Garnry points to Samsung where recent battery breakthroughs (read: graphene) have the potential to boost lithium-ion battery capacities by 45% and recharging times by a factor of five.

For more on forex, commodities, equities, and technical analysis, watch today's Morning Call in full above.

 Dawn in Vienna: Will Opec and Russia prove able to continue their production cut deal at Thursday's Opec summit? Photo: Shutterstock

Michael McKenna is senior editor at Saxo Bank


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