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Market Update

EncoreFX’s daily market updates are written by our experienced and professional dealing team.

Oil Up After Further Production Agreements

Published December 12, 2016
  • Oil prices rose to their highest levels since July 2015 this morning, after major producers agreed to cut output over the weekend, and received an additional boost when Saudi Arabia indicated they may be prepared to offer even more cuts than originally promised
  • In their first deal since 2001, producers from outside OPEC (including Azerbaijan, Bahrain, Bolivia, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Sudan, South Sudan and Russia) agreed with OPEC to cut output by 558,000 barrels per day; countries included in this deal will meet again in May 2017 to review progress
  • Energy analysts applaud the symbolism of the deal, however, at the same time fear that compliance and effective monitoring of all deal members’ respective daily production will be difficult; high oil prices could possibly entice deviations from the agreement and will certainly encourage US Shale producers to move to fuller capacity (see Chart 1)
  • Following the agreement, surging crude oil prices fueled the commodity-linked Canadian dollar, dragging the USD/CAD pair to its lowest level since October 20, 2016
  • After an initial slump in the vicinity of the 1.3100 handle, the USD/CAD pair has managed recovery to around 30-pips from session low and is currently trading in the mid-1.3100s
  • However, a jump in oil prices stoked inflation bets and caused a US bond sell off on fears of “Trumpflation”, which may allow front-end rate differentials to move against the CAD in the future
  • There is little data from the Canadian and US market out today; markets look to the FOMC meeting and policy decision on the 14th where the Fed is expected to increase their lending rate by 25 basis points
  • This has largely been priced in by the markets already, however, market participants will look to any indication of further rate hikes in 2017 as well as sentiment from Janet Yellen and the Federal Reserve
  • Foreign Minister Paolo Gentiloni will replace Matteo Renzi as Prime Minister of Italy as the country continues efforts to assist its third biggest lender Monte dei Paschi after the European Central Bank refused to allot the bank more time to raise the money it needs to avoid collapse; Gentiloni has full assistance from the Italian Treasury to bail out the bank if necessary
  • The Euro gained almost half a percent against the USD, indicating that the Eurozone market is not convinced that the Fed will promise in rate rises for next year

Charts: (1) US Shale Rig Count vs. Oil Prices (2) USD/CAD finds support levels along 200 Daily Moving Average at 1.3077