Euro Steady Ahead of ECB Meeting Minutes

Adrienne Murphy – Chief Market Analyst

Overview

The euro is 0.06% stronger as investors turn their attention to the minutes of the latest European Central Bank meeting, released later today. Investors are hoping for clues on when the central bank will start to reduce its quantitative easing programme.

However, the single currency is hovering at a six-week low thanks to brewing tensions in Catalonia. Spanish Economy Minister Luis de Guindos noted that Catalan banks have expressed concern over the independence referendum and threatened to leave the region in favour of other parts of Spain if the push for sovereignty continues. The minister condemned Catania’s separationist politicians and that independence from Spain was out of the question.

Catalan president Carles Puigdemont will likely officially call for independence early next week, a move that would be quite bearish for the euro.

Meanwhile, the greenback is 0.01% stronger, against a basket of its peers, as US investors await the highly-anticipated non-farm payrolls, taking place on Friday. However, the results of the jobs report will likely have little impact on the direction of monetary policy as the shift will be put down to the devastating effects of the recent hurricanes.

Stocks

European equities are shrugging off the contentious relations between Catalonia and Spain. The IBEX 35, Spain’s proxy, has added 1.3%, rebounding from its dramatic fall in the wake of the referendum result.

France’s CAC 40 is 0.08% higher while Germany’s DAX 30 is 0.01% weaker. There’s a definite sense of caution in equity markets.

US equities are slightly higher. The S&P 500, Wall Street’s proxy, has added 0.03%, while the Dow Jones is 0.01% higher. The tech-heavy Nasdaq 100 has gained 0.04%.

Commodities

Expectations that Saudi Arabia and Russia will increase the length of oil cuts has stimulated prices. Russian President Vladimir Putin said this week that the cartel could extend the cuts to the end of 2018.

Oil is set for its worst week since early July as investors began to take-profits after three months of gains.

Crude oil inventories decreased significantly this week, providing a bullish narrative for oil traders and diverting attention away from the increasing output from both the US and OPEC.

Brent oil has climbed 0.65%, trading at $56.13. The US benchmark, crude oil has advanced by 0.32% after trading below the $50 mark overnight.

Oil rallies on talk of extending OPEC supply-cut

Oil prices rebounded on Thursday as OPEC leader Saudi Arabia and ally Russia, meet to discuss a possible extension of production cuts.

After trading below the $50 mark overnight, crude oil managed to gain 0.5% amid rising exports from the US. Meanwhile, Brent oil gathered up 0.9%, after the roughest few days since early July.

Russian president Vladimir Putin noted that OPEC and allies could extend the cuts until the end of 2018. The original deal started in January, in an effort to tackle the supply glut which has plagued the industry. By agreeing to cut 1.8 million barrels a day, the cartel have made strides in the price war, solidifying gains, particularly seen in the last three months, as investors see the dent in supply.

Thanks to the reduction in output and better-than-expected demand in Asia and, more surprisingly, in industrialized nations, prices have creep up.

The robust US shale industry has continued to cap gains. Higher prices mean US producers have higher margins, allowing ample room to leave the taps on oil rigs flowing.

How did the price war begin?

Back in November 2014, OPEC ministers huddled in Vienna to discuss the dramatic fall in oil prices. Oil prices had plunged to their lowest point in four years. For decades, the cartel would suppress production sending oil prices higher, this time, however, was different. OPEC’s usual price manipulation schemes were not enough to shift oil prices.

Fracking was the game changer that revived the shale industry and helped to solidify American’s dream of independent of foreign oil.

Once again Research and Development proves to be one of the most important facets of a business.

While OPEC members were distracted by under-cutting its competitors and curtailing oil production, the US were busy devising ways to extract oil and gas more efficiently. By employing unconventional means of extraction and investing more in technology, the techniques of US companies became more and more cost effective which brought down the breakeven point from about $60 to about $40 per barrel.

In 2011, former President Barack Obama devised a plan to decrease America’s dependence on foreign oil. Obama established a plan to reduce oil imports by one third by 2020. The strategy was composed in an effort to stimulate economic growth, create jobs and bring down the trade deficit.

  • What were the basic components of the plan?
  • Firstly, to Invest in research and development
  • Secondly, Substitutes for oil
  • And finally, to Support stronger fuel efficiency

So, what’s the oil market like under the Trump administration?

Donald Trump promises to go not one, but five steps further than Obama’s era.

A self-professed lover of fracking, Donald Trump intends to revise the Obama administrations rule which required companies to disclose chemicals used on federal land when fracking for oil and gas.

However, Trump may not necessarily be bullish for oil. The president plans to sell-off half the US reserve stockpile to help balance the budget. Although the proposal has faced pushback from Congress, the plan could undermine the US shale industry by flooding the market with supplies.

The oil market is particularly sensitive to bearish news right now however less sensitive to bullish readings.

However, defiant and exempt OPEC members as well as the robust US oil industry have presented an insurmountable barrier for oil. Only a relentless fall in total US storage will hurl oil from this bearish market, but so far, all we’ve seen are swelling stockpiles.

Saudi Arabia’s efforts to re-balance the rise in Libyan and Nigerian supplies by reducing output by 1m barrel a day is an admirable approach. The cartel would ensure investors that they will do “whatever it takes” to revitalise the market. If Saudi Arabia make the cuts we should see oil tip above $50 again.

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Euro Rise Ahead of ECB Meeting As Oil Rallies On OPEC Supply-Cut
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