By John Acher
Oil prices jump to their highest level in two weeks when Saudi Arabia and Russia voiced support
at the weekend for extending the current Opec-led production cuts by nine months, to the end of March 2018.
"They took some time out to tell the market that they are both agreeing on extending the current production cuts all the way to the end of March next year," says Saxo Bank's commodities strategy chief Ole Hansen.
The news gave oil an additional boost, and drove a continuation of a rally that began last Wednesday on the back of a bullish inventory report, Hansen says.
“We have retraced 50% of the April-to-May selloff. We are finding some resistance at this stage up towards the high end of $48/barrel," Hansen says. "We got the 50% retracement coming in at $48.75 and the 200-day moving average just above there.”
WTI crude oil price jumps back to high end of $48/barrel
Source: Saxo Bank
“What we are seeing at the moment is a short-covering rally. We need additional news for this really to become an increased move to the upside because we need to see new longs starting to get into the market as well,” Hansen says. “And I think, at this stage, the market is still pretty uncertain about the timing of when the market is going to rebalance.”
“But, in the short term, we have made a break back above what was key resistance and now is key support, and that is helping to sooth some of the nervousness in the market,” Hansen says.
The big international infrastructure spending plans, which countries met to discuss in China this past weekend, have boosted industrial metals prices, particularly of copper.
“Seventy-nine billion dollars has been pledged by China towards the One Belt project, and they are calling it the project of the century, so that is giving some support to copper,” Hansen says.
Gold’s slide towards $1,200/oz has been halted, and the price is stuck in the $1,200 to $1,250/oz range.
Most of last week’s selling of gold was due to long liquidation, rather than new shorts, Hansen says. “So there doesn’t seem to be much selling appetite in the market at this stage – it’s primarily longs having to adjust to the new and lower price that we have seen over the past weeks.”
Cocoa prices leapt more than 3% on Friday as unrest erupted in Ivory Coast, taking Hansen’s long trade view on cocoa (from last week) to its first target. “It probably will consolidate somewhat now, it seems like some of the unrest […] has eased a bit, but we are keeping a relatively tight stop on the balance.”
“We had some very weak inflation data, which caught the market by surprise on Friday,” says Saxo Bank’s fixed-income trader Michael Boye.
“The headline numbers were pretty much as expected, but if you dig into the core element of the numbers, it was slightly disappointing, and that means the annual CPI rate has fallen every month since January, when it was 2.3%,” says Boye.
That has dampened inflation fears.
“And the market is reacting by moving yields a little bit lower,” Boye says, noting that the 10-year Treasury yield has fallen almost 10 basis points to 2.3%, which is a key support level.
US 10-year government yield falls
Source: Saxo Bank
“So it is interesting to see if this moves the market’s expectation for the Federal Reserve as well,” Boye says.
The likelihood of a June Fed rate hike, which had been nearly fully priced in, has fallen to 93%, according to Bloomberg, Boye says.
In the corporate bond markets, the Singapore commodities trader Noble Group is back in the headlines after a new profit-warning late last week.
“So it has really got hammered here in the markets, both the stock and the bonds,” Boye says.
“They are trading basically on recovery estimates at this point.”
“They are speculated to be in talks with a strategic investor, and they are still trying to sell assets and improve their liquidity, but it is obviously a very troubled situation for Noble,” he says.
“It was previously an investment-grade-rated company, so it would be quite a remarkable situation if they actually defaulted, and we have seen it add pressure to the mining sector throughout,” Boye says.
Offshore oil and gas rig. Oil prices got a boost from Russian and
Saudi verbal intervention at the weekend. Photo: Shutterstock