Output in US renews growth as rising oil price lure producers
The oil market nudged up in Asian session extending gains to London trading, as Saudi Arabia's promise to cut exports by 1M barrels provides significant sentiment boost, trying to make out the way to the top under the yoke of growing supplies of American producers. Meanwhile Saudi Arabia attempts to exercise complex approach to show traders that supplies are declining - the cartel participants will meet on August 7-8 to report on how each of the member sticks to the production plan. The meeting with same agenda in May proved to be a big miss (the degree of commitment declined to 78%) and pushed the market down. But this time Saudi Arabia hopes that the news will provoke the positive backlash.
On the US side the rig count decline did not last long as the oil gains prompted US producers to response by stepping up drilling pace. According to the weekly data of Baker Hughes, the number of rigs increased from 764 to 766, swinging up and down for the fourth week in a row. This provides us with valuable information that the oil market has arrived to fragile equilibrium, and further growth in oil prices will be accompanied by an increase in drilling activity in the US, which in turn will drag the market back to a price equilibrium of about $50. Any negative updates from OPEC or the US can work badly for the balance by sending prices below $50. The positive signal also comes from the futures market, where according to CFTC data net position for crude oil grew four consecutive weeks, reaching a three-month high of 423.3K contracts.
Spring US output missed estimates what might suggest that the economy falling short of forecasts takes on a chronic form. Out of the aggregate of indicators, only the leading indicators remain positive, such as consumer sentiment, orders for durable goods, and so on. In the second quarter, GDP grew by 2.6% in annual terms, with a forecast of 2.7%, labor costs - an indirect indicator of wage growth in the economy, increased by 0.5% in the second quarter, with a forecast of 0.6%. This lag is positive for export growth, but it is negative for inflation. Since a weak dollar increases the revenue of US exporters, and the Fed is increasingly inclined to support soft stance, shares of exporters as well as some commodities, receive additional room for growth.
For Monday EURUSD trading, it is necessary to focus on inflation data in the eurozone which in case of a positive deviation will reinforce the case for tapering off in September, pushing common currency higher. There is an obvious divergence of the ECB stance and investors' expectations & economic statistics and if the second goes well, officials will probably have to listen the market leaning towards the accelerated path of tightening. We are still waiting for a correction for EURUSD, but active selloff will probably start a little higher after bumping into resistance around 1.18.
On the US side the rig count decline did not last long as the oil gains prompted US producers to response by stepping up drilling pace. According to the weekly data of Baker Hughes, the number of rigs increased from 764 to 766, swinging up and down for the fourth week in a row. This provides us with valuable information that the oil market has arrived to fragile equilibrium, and further growth in oil prices will be accompanied by an increase in drilling activity in the US, which in turn will drag the market back to a price equilibrium of about $50. Any negative updates from OPEC or the US can work badly for the balance by sending prices below $50. The positive signal also comes from the futures market, where according to CFTC data net position for crude oil grew four consecutive weeks, reaching a three-month high of 423.3K contracts.
Spring US output missed estimates what might suggest that the economy falling short of forecasts takes on a chronic form. Out of the aggregate of indicators, only the leading indicators remain positive, such as consumer sentiment, orders for durable goods, and so on. In the second quarter, GDP grew by 2.6% in annual terms, with a forecast of 2.7%, labor costs - an indirect indicator of wage growth in the economy, increased by 0.5% in the second quarter, with a forecast of 0.6%. This lag is positive for export growth, but it is negative for inflation. Since a weak dollar increases the revenue of US exporters, and the Fed is increasingly inclined to support soft stance, shares of exporters as well as some commodities, receive additional room for growth.
For Monday EURUSD trading, it is necessary to focus on inflation data in the eurozone which in case of a positive deviation will reinforce the case for tapering off in September, pushing common currency higher. There is an obvious divergence of the ECB stance and investors' expectations & economic statistics and if the second goes well, officials will probably have to listen the market leaning towards the accelerated path of tightening. We are still waiting for a correction for EURUSD, but active selloff will probably start a little higher after bumping into resistance around 1.18.
This analysis is provided as general market commentary and does not constitute investment advice. Past performance is not indicative of future results