Appetite to risk boosted by higher oil prices, is $60 a short term target?

October 11, 2016

Most Asian stocks traded higher on Tuesday with a strong lead from U.S. equities, a weaker Yen, and higher oil prices. 

Russia’s willingness to join OPEC in stabilising prices pushed oil 3% higher on Monday, after President Vladimir Putin said that Russia, the world’s biggest oil producer, was ready to co-operate to limit oil production. Now with the market share war coming closer to an end, we can say that the worst for oil is behind us, but comments from Saudi’s Minister of Energy and Chairman of Aramco Khalid Al-Falih that prices could rise to $60 a barrel seems a bit optimistic at the current stage. 

Markets are already pricing in a potential deal to cut output, and prices have risen by more than 15% since OPEC members met in Algeria on September 28. I do believe that an official agreement will be reached when the cartel meets by the end of November, but the key questions to be asked thereafter are to what extent will they adhere to the new set quotas? What if the prisoner’s dilemma comes into play? How fast will Nigeria’s and Libya’s supplies return? And what does $50 a barrel mean to the shale oil industry?

Overall, I am optimistic that we’re getting closer to a rebalanced oil market, but as always markets do overreact to rumours which suggest that any upside should be limited from current levels.

The U.S. dollar resumed its Monday’s rally with the index back above 97 despite no data being released. However, traders seem more convinced that a December rate hike is coming with U.S. 10-year treasury yields climbing above 1.76% and CME’s FedWatch showing expectation for December rate hike standing at 70%.  Meanwhile the pound came under renewed pressures, extending its drop for the fourth straight session as traders continued to ignore the positive flow of economic data and focused on the price that U.K. has to pay for a hard Brexit.

In the commodity currencies space the Kiwi dropped by 1% to a 3-month low of 0.7062 as RBNZ’s John Mc Dermott made it bluntly clear that further monetary policy easing is on the way. Inflation remains to be the key indicator frightening central bankers and with New Zealand’s CPI just slightly above zero in third quarter, more should be done to reach the 1-3% inflation target.  

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