A time for friendship

FX:UKOIL   CFDs on Crude Oil (Brent)
Fiscal Reform in the US

The Republicans failed to agree on Thursday so they postponed voting on the bill on Friday. Because of the minimal edge, the vote of every Republican is important for success of the reform, that’s why senators have to seek for a tradeoff with the "fiscal hawks", who see an acute problem in expansion of the budget deficit as a result of the tax cuts.

Nevertheless, it is not clear at all whether the Senate will be able to reach constructive agreements on Friday.

The dollar was able to recover losses, and stock markets rose after supporters of the bill were able to get Senator John McCain into their ranks, which, incidentally, opposed to the failed healthcare reform.

Yields on US debt securities rose due to upbeat data on inflation and unemployment claims in October. The market expects a rate hike in December and several increases in 2018.

The oil market

The meeting in Vienna ended with extension of the pact until the end of 2018, leaving a hole for reviewing the agreements in June 2018 in case the market feels very good. In my opinion, the second condition was the key result of the meeting showing high confidence of OPEC in a friendly behavior of its rival - American oil shale companies. However Russia looked at the reverse side of the problem - getting out of the deal so as not to stay out of the way if the shale companies begin to behave aggressively. This can again lead to a collapse in the market.

It remains unlikely that shale companies will dramatically increase investment to increase production. Most likely we will see an increase in dividend spending for waiting-too-long shareholders. Aggressive behavior is likely to be condemned because it will doom companies again for price wars and cut profits that shareholders are unlikely to tolerate. In addition, the industry has a high level of debt financing, which also significantly reduces the safety of shale companies in the competition with OPEC.

After a slight correction, prices again have room for growth in the direction of $70 per barrel. Catalysts, as usual, will be supplies outages in various regions and improving demand outlook.

Arthur Idiatulin

This analysis is provided as general market commentary and does not constitute investment advice.