Oil traders holding their breath

If there’s one important event to watch today, it’s the OPEC decision. All traders, from bulls to bears are holding their breath before the OPEC+ decision. The expectation is that OPEC producers add another half-a-million barrel per day to the global supply, relaxing their strict production cut regime on the back of business reopening, improved travel and activity prospects. The problem is, the latest news flow hasn’t been encouraging on the Covid front. We now see cases rising across the globe, some countries going back to strict lockdown measures and to imposing travel restrictions.  

If another wave of contagion sticks up its nose and changes the direction of the wind, then the global oil demand could take an unexpected hit.  

Yet, the global glut that was building during the pandemic has now dried and OPEC probably has the margin to take a chance for increasing supply, with the possibility of reversing the decision as early as next month, if needed. Therefore, the base case scenario is a 500’000-barrel increase in daily OPEC+ supply and a potential deeper downside correction in US crude price to $72/70 region. But in case of a surprise no-move, we may well see the price of a barrel shoot above the $75 mark.  

FTSE futures hint at a slight positive start on Wednesday, yet the energy-heavy index is clearly at the mercy of the OPEC decision and the reaction in oil prices.  

On the data front, I was saying yesterday’s ADP report better be good to keep the investor mood intact yesterday. Happily, the print was better than expected, showing that the US economy added almost 700’000 jobs last month. The news gave a boost to the Dow Jones which closed the session some 0.60% higher, but Nasdaq lagged with a 0.17% drop through the session. The US dollar strengthened, which was an anticipated kneejerk reaction in case of a solid data print. And the EURUSD slipped below the 1.1880 as predicted. The pair is now consolidating losses a touch below the 1.1850 and should continue pushing lower at least until Friday’s NFP figures. In theory, there is no strong correlation between the ADP and the NFP prints; a strong ADP print doesn’t guarantee a strong NFP figure, but it gives us the confirmation that a strong data is welcomed by investors, and a soft data wouldn’t have seen the ‘bad news is good news’ reaction, as the Fed doves are debilitated with a 5% inflation and could not to much in case of a soft read. So Friday’s figures better be good as well.  

Wednesday’s strong jobs data benefited more the reflation stocks and left the Nasdaq index slightly behind. But the OPEC decision and energy prices will likely drive the markets at today’s session.