OPEC-led Oil rally remains short-lived

The week kicked off with a jump in oil prices, after Saudi announced that it will cut its production by another 1mbpd starting from July, pulling its production to the lowest levels since years. 

The UAE will be given higher quotas, as African countries - which repeatedly fell below their production quotas– will see their upper production limit lessened.  

Saudi will continue doing the heavy lifting of production cuts, hoping that its efforts will reverse the falling price trend in oil markets and boost prices, but the gifts to some OPEC members in expense of the others hint that we could see further cracks within the cartel in the next few months, and that’s not a winning setup for OPEC, and oil bulls.  

US crude gapped 3.5% higher on Monday open, while Brent crude traded past $78pb. But the rally remained short-lived, and below the peak reached after Saudi Prince bin Salman had told oil bears to watch out a couple of weeks ago.  

Oil bears – decidedly daring, rushed in to sell the rally triggered by the Saudi decision, as expected. Most of the gains are gone even before Europeans woke up. 

The short-term price risks remain tilted to the upside as OPEC meeting continues today, but any price rally continues to be seen as interesting top selling opportunity by oil traders, as Chinese post-Covid reopening doesn’t gather the pace investors expected, while above-target global inflation and tight monetary policies threaten global growth. Any further price rally will likely hit resistance at 50/100-DMA range, between $74.90/75.50 area, and the 200-DMA will likely act as an ultimate stop at $78.90.

Seeing the glass half full

Asian equities were mostly in the green this Monday, to catch up with the US session rally following Friday’s jobs data. The US economy beat expectations for the 14th straight month and printed another blowout NFP data. The US economy added 339K new nonfarm jobs in May, far above the 180K expected by analysts. That would’ve been bad news for the Federal Reserve (Fed), if the wages growth hadn’t eased – though slightly, and the unemployment rate hadn’t jumped to 3.7% from 3.4% printed a month earlier.  

As a result, investors preferred seeing the glass half full, betting that the Fed will likely pause hiking rates in June. The probability of a no hike in June rose to 75%, but activity on Fed funds futures still price in more than 50% chance for a July action, if inflation remains sticky and economic data strong enough.  

The idea of a June skip & July hike keeps the US short-end of the US yield curve tilted to the upside. The US 2-year yield jumped past 4.50% on Friday, after the solid NFP read, and stabilizes above that level this morning.  

The US dollar remains well bid against most majors, as the EURUSD is offered into the 1.07 level, and the USDJPY easily finds buyers below the 140 level, as yield spread between the US Japan 10-year bond spread remains favourable for buying the pair.  

The US dollar remains under pressure against the Canadian dollar, on the other hand, as the OPEC-fueled oil prices leads to some inflows into the Loonie, while the AUDUSD spiked on Friday, boosted by a rally in iron ore futures, and defying a broadly bid US dollar. 

The Reserve Bank of Australia (RBA) and Bank of Canada (BoC) will deliver their next policy decisions this week, and both are expected to keep the rates steady at this week’s meetings. But swap contracts showed a better chance for a rate hike on Friday, than a pause. A surprise rate hike from the RBA should give a further strength to the AUDUSD, but the deteriorating macroeconomic environment, the slowing China and falling raw material prices would normally be expected to soften the RBA’s hand. If that’s the case, we shall see AUDUSD remain under pressure for some more weeks. 

Liquidity drain

In equities, the rising yields haven’t yet translated into selling pressure. The S&P500 rallied 1.45% on Friday, and is now approaching last summer peak, as the US debt ceiling agreement, and strong jobs data hinted that the US is still far from recession levels. The problem is that the US Treasury will issue a ton of new bonds from now to refill the Treasury’s General Account which got almost emptied during the debt ceiling crisis, and that will hit the market liquidity along with the Fed which will continue pulling away liquidity from the market within its QT program. Lower liquidity will likely lead to a decent downside correction in equities in the coming weeks.