Oil looking for bottom; BOE divided – Market Update
CurrenciesEUR/USD – while it was trading down in the morning, it turned around as the USD was weakening over the course of the day and that is because of increased safe haven buying which weakened the USD.
USD/JPY – is dropping and is trading near the lowest levels of the year as the JPY is gaining strength due to safe haven buying. This has everything to do with the Brexit fears coming back to the center.
GBP/USD – extended its slide as the Brexit fears are alive and well once again after the comments of PM May over the weekend. We could be headed to the lowest level since October if we continue like this and break below the 1.20 level again.
IndicesDow Jones – we will have to wait a bit longer to reach the 20,000. Each time we are an inch away, we see a pullback, this time due to the drop in energy prices. Nonetheless it looks like reaching the 20,000 is only a matter of time, unless earning season which will start this week will cause stocks to drop.
S&P 500 – is moving down again after reaching a record high on Friday. The drop in the energy sector is definitely not helping. We will slowly start turning towards the earnings, as reporting will start from later this week and that is likely to have a large impact.
CommoditiesGold – reached the highest level since the end of November, even though we are still expecting several interest rates this year. The reason for the rise yesterday is the fact that there was safe haven buying due to fact that is seems more and more likely that there will be a hard Brexit and there will not be a possibility for the UK to remain part of the single market and also fears that the UK will fall apart.
Natural Gas – dropped again considerably and is so far not having a good start of the year, having dropped already over 13%. As was the case last week, the expectation for better weather in the US is causing natural gas to drop as that will reduce the demand for natural gas.
Oil – dropped sharply to reach the lowest level in nearly a month after the expectation is that production in the US will increase and offset some of the cuts that will be made by OPEC and non-OPEC countries. That expectation is fuelled by the constant rising rig count in the US which has been rising for 10 weeks in a row now. In general though, the rig count is increasing worldwide, so it is not only in the US that production could increase. In addition, Nigeria said that its production increased to 1.9 mbpd in December, and this could rise further as Nigeria is exempt from cutting production, as are Iran (which is producing close to 4 mbpd) and Libya.
While there have been serious doubts regarding the production cut, the Kuwaiti Oil Minister has said that the cuts do not, and are not expected to be immediate but that it is a process. This means that we will see production decline gradually towards the goal if at all. This makes non-compliance even easier and more likely, even though he said that most countries are implementing it and have cut production considerably. Especially worrisome on this matter is the fact that Iraqi production rose considerably in 2016, and also in December it still increased and exports from its southern ports reached a record high.
Another factor that caused oil to drop is that fact that the US Department of Energy announced that it will sell 8 million barrels of oil from its Strategic Petroleum Reserve, adding more oil to the market.