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Video / 15 May 2017 at 7:23 GMT

From the Floor: Oil jumps as Saudi, Russia back more cuts —#SaxoStrats

   • Oil jumps as Saudi Arabia and Russia say cuts should be extended to March 2018
   • WTI retraced half of the April-to-May selloff on Saudi and Russian verbal support
   • Oil's rally driven mainly by short-covering at this stage: Hansen
   • Market would need more new longs emerging to drive rally further: Hansen
   • Gold stuck between key levels of $1,200 and $1,250 /oz
   • China-led talks on big infrastructure spending boost industrial metals
   • Very weak US inflation data on Friday caught fixed-income market by surprise
   • US yields a bit lower on weaker-than-expected inflation
   • June Fed hike looks a little less certain, though still priced at 93%: Boye
   • Commodities trader Nobel Group's stocks and bonds hammered on debt fears

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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.

The announcement from the two big oil producers came on the sidelines of a meeting in China to discuss China's plans for huge new international infrastructure spending.

"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
WTI oil price
 Source: Saxo Bank

“At this stage, I don’t think it is because the market is getting extremely bullish once again – this is primarily driven by short-covering,” he adds. (Read also Hansen's latest on the positioning in the oil and metals markets based on the Commitments of Traders report here on TradingFloor.)

“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.

China boost

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.”

Yields down

“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
US 10-year yield
 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.

The Saxo Bank strategy team in Singapore has held its weekly Macro Monday webinar, which is available here on TradingFloor.

Offshore oil platform
 Offshore oil and gas rig. Oil prices got a boost from Russian and 
Saudi verbal intervention at the weekend. Photo: Shutterstock

John Acher is a consulting editor at TradingFloor


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