From the Floor: Oil noise can't change the facts
- Russia, Opec both verbally intervene to help bolster oil price
- Market capped at $50/barrel as the new entry point for US rigs — Hansen
- Rally driven by escalation in short positions in WTI — Hansen
- Gold consolidates in higher range of $1,315-65/oz — Hansen
- Avalanche of US 3-year Treasuries to bring price pressure — Fasdal
- ITRAX could go sub-300 points as ECB QE money sloshes through — Fasdal
- CLICK ON THIS LINK FOR A REPLAY OF OUR MORNING CALL
What do you do when the market is not quite behaving the way you want it to? Start shouting rather loudly of course and both Opec and non-Opec member Russia have both verbally intervened in the oil markets after the benchmarks lost some 20% in price by the middle of last week.
It's a weapon that can only be used sparingly for fear of being overused, but it has on this occasion done the trick, says Saxo Bank's head of commodities strategy Ole Hansen.
"We've had a continuation of the oil rally that started last week and yesterday, the driver was the intervention from Russia and Opec", he says. "It's a well-known tactic used by producers and it has helped to stabilise the market".
Brent crude was at $44.86/barrel at 0655 GMT. WTI was at $42.55/b.
"The problem with this tactic is that once the price gets to around $50/b, then the US rigs come back into play", says Hansen. "The line was around the $60/b mark a year ago".
Saxo's commodities chief points out that much of the rally has been driven by short covering after an escalation of short positions in WTI over the past few weeks.
"It's a patient game and a waiting game here for suppliers. Until demand catches up, the upside remains limited", he says. "The market will eventually start to focus on the billions of dollars of lost investment in the past few years".
For now, says Hansen, WTI is facing resistance to further upside moves at the $43.50/b mark and Brent is likewise contained at the $45.90/b area.
The escalation of WTI short positions in recent weeks
It's a different picture in gold where, despite some licking of wounds after the return of some risk-on spurred by Friday's huge nonfarm payrolls number, the consolidation of a higher range for gold seems set in the $1,315-65/oz zone.
"The key driver for this is the demand for ETPs and as long as we see that, there will be an underlying demand for gold that will limit the downside", says Saxo's commodities chief. "Having seen how the market has reacted recently when it has tested lower, anyone hoping for downside should only use options".
Gold ETP demand continues to underpin strength despite the risk-on led hiccup this week
As well as feeling some of the heat from the early risk-on sentiment this week, government bonds can also expect to come under some price pressure from the issue of some $24 billion in three-year US Treasuries tonight with another tranche of 10- and 30-year Treasuries to follow.
"There is huge supply coming tonight and that should bring in some price pressures, even if the markets are opening in somewhat optimistic mode", says Fixed Income desk head Simon Fasdal.
Core bonds were up slightly at the open at 167.28 and have settled into a 166-68 range, says Fasdal. One of the recent winners is the energy corporate bond sector, he adds, and points out that "further headlines from Opec" should be watched carefully.
With some $12 billion of corporate bonds also on the way, the ITRAX has contracted towards 300 basis points and Fasdal says it could go below the 300 line given all the quantitative easing money sloshing around the system from the likes of the European Central Bank.
The ITRAX is contracting towards 300
We pointed out that gold looks relatively consolidated in its higher range but platinum could be vulnerable to a downside slide given that it is a much smaller market than its precious metal sibling.
"Platinum is most exposed to a correction given that the market is much less liquid", warns Hansen. "But, as long as gold stays above $1,315/oz, it should be ok".
Martin O'Rourke is managing editor at Saxo Bank