Markets Priced In OPEC Output Cut Extension

There are two upcoming events that are expected to impact the price of Oil; firstly, the Iran presidential election will be held today (May 19th) and secondly, the OPEC meeting will be held on May 25 in Vienna. The result of the Iran presidential election and the associated geo-political risks will likely affect its oil production.

Overall, the execution of OPEC’s output cut agreement has been sound. However, some OPEC member states exempted from the agreement, such as Iran, Libya, and Nigeria, have been increasing their production. Some non-OPEC oil producers, such as Russia and Kazakhstan, also attempt to enlarge their production.

In addition, the US shale oil industry has seen a marked recovery since February last year because of higher oil prices. The US Baker Hughes data (that records the number of new Oil Rigs) is showing additional Rigs added every week. Since May 2016 the US has added more than 400 new rigs.

In general, the oil supply remains high, which has and will offset OPEC’s output cut effort to an extent. If OPEC announces that the output cut is to be extended we will likely see a moderate rally in oil prices, instead of a surge, as markets have priced in the extension to an extent.

Oil prices have rebounded approximately 7% since May 5th. On Thursday, WTI spot hit a 4-week high of $50.29 a barrel. Brent crude spot hit a 4-week high of $53.29 a barrel. USD/CAD has seen a 1% retracement since May 5th because of the oil price rebound. The level at 1.3500 will likely provide a stronger support.

Today we will see the release of a set of Canadian economic data for March and April, including; CPI, core CPI and retail sales. These data releases will likely affect CAD and CAD crosses.

On Thursday, the dollar index hit a post presidential election low of 97.26, then experienced a moderate rebound, touching 97.96 then retraced, as there is heavy pressure at the level at 98.00. USD/JPY hit a 3-and-a-half week low of 110.22 with the downtrend holding above a significant support line at 110.00. Gold has seen a 1.19% correction after hitting a 2-and-a-half-week high of $1264.92 because of the dollar rebound.

It was reported that the Trump Camp had contacted Russian officials 18 times by phone and emails before the presidential election (from April to November 2016). Some election staff pointed out that it is not unusual for presidential candidates to contact foreign officials. However, liaison with a non-aligned country (Russia) with high frequency seems to be unusual.

The downtrend of USD has been temporarily held; the next move of USD will likely depend on upcoming economic data, FOMC minutes and the progress of the FBI investigation into Trump’s Russia leak scandal.