Oil Steadies But For How Long?

• Traders continue to test the resolve of oil producers;

• May faces counterparts after humiliating election campaign;

• GBP remains volatile with BoE as polarised as British public.

We’re seeing risk aversion in the markets once again on Thursday, with US futures currently slightly in the red, Gold adding to recent gains and the yen edging higher.

After falling into bear market territory – having fallen more than 20% from a recent peak – oil appears to have found some support on Thursday, buoyed by Wednesday’s inventory data from EIA which reported a 2.451 million reduction in stocks. The number was roughly in line with that reported by API the day before but traders still appear a little unconvinced by these and tend to wait for the EIA release. While this has offered some near-term support, there’s little reason at the moment to believe that oil isn’t headed for further losses.

Traders appear to be testing the resolve of those countries that signed up to the production cut, having been clearly disappointed with the decision not to deepen the cuts on top of extending them by nine months. Oil is currently trading at seven month lows despite a commitment from a number of producers to bring the market back into balance. Ten of the last 11 inventory reports from EIA have been drawdowns and yet, traders appear unconvinced, with rising output in the US, Nigeria and Libya being touted as the reason behind this. Regardless of what’s driving these moves, the real question is how much more producers will stomach before they consider deepening the cuts?

As has been the case for a number of weeks now, the UK will once again be in focus today as Theresa May faces her EU counterparts for the first time since the election at a summit Brussels. May will be seeking to put the humiliating experience behind her and instead focus on achieving a good deal for the UK but the reality is, her hand has been weakened and her counterparts will be fully aware. May is expected to outline plans for citizens’ rights following the divorce, something that has already been a contentious issue and one that everyone wants to resolve quickly. Still, both sides are at odds on the details of how it will be achieved and how this is handled could offer some clues into how the rest of the talks will go.

The pound has not been lacking in catalysts recent, with the Bank of England being the latest to chip in. The vote on interest rates last week saw three policy makers favour a hike – including outgoing Kristin Forbes – a scenario that Governor Mark Carney later played down, only for his colleague Andy Haldane – who voted to leave rates unchanged last week - to take the opposite view. It would appear the BoE is as polarised as the rest of the country at the moment, which should complicate matters further in the months ahead and make it increasingly difficult to anticipate what they will do.

We have another quiet session on the cards, with US jobless claims and Canadian retail sales the only notable releases. We’ll also hear from the Fed’s Jerome Powell, who will testify before the Senate Banking Committee, as well as the BoE’s Kristin Forbes who, as mentioned earlier, will leave the BoE later this month.