Briefing highlights
- What OPEC-Russia deal could mean
- Oil prices inch up after drop, then fade
- Markets at a glance
- G7 leaders meet in Italy
- U.S. economy grows at tepid 1.2%
- BlackBerry gains $125-million more in Qualcomm settlement
‘Deflategate’
There’s a lot to play out still before markets can gauge the longer-term impact of OPEC’s “Deflategate” on oil prices and the loonie.
Crude prices rose slightly after Thursday’s dive, though are fading again, and the Canadian dollar is inching up again after the OPEC-induced slump.
The loonie had been on something of a roll, if you consider heading back up toward three-quarters of a dollar to be a roll, but then fizzled along with crude, trading so far today between a low of 74.09 cents (U.S.) and a high of 74.44 cents.
This comes after OPEC and non-OPEC producers agreed Thursday to extend their oil output caps by nine months.
Saudi Arabia and Russia had flagged that earlier, so Thursday’s agreement was no surprise. But some had been looking for a lower and/or longer cap, deflating crude prices, which remain down today.
The Canadian dollar, as always, marched to oil’s drummer, having been stronger after less-dovish talk from the Bank of Canada on Wednesday.
“The loonie has been a very good proxy for trading the declining oil story, given that the post-BoC rally in CAD opened the door for interesting top selling opportunities, and traders clearly jumped on the occasion,” said London Capital Group senior market analyst Ipek Oskardeskaya, referring to the Canadian dollar by its symbol.
“Now, it is the same old story,” she added.
“The market was fundamentally disappointed with the OPEC’s nine-month extension plan, and the selloff that hit the oil markets posterior to the OPEC statement could extend, keeping the downside pressure high on the loonie. The 73-cent level appears to be a reasonable target in the coming weeks.”
Part of the problem was the lack of any surprise in yesterday’s pact between OPEC, Russia and the others. The market also wants to see “firming fundamentals,” said Royal Bank of Canada and other observers.
“After Saudi Arabia and Russia announced plans to extend the output agreement by nine months a week and a half ago, expectations had been building going into [Thursday] of an even longer or deeper cut,” said Helima Croft, RBC’s head of commodity strategy in New York.
“Thus, there was no repeat of November’s surprising statement, which contained a much greater degree of specificity (individual country targets) than anticipated,” she added in a report titled “OPEC Deflategate.”
She noted that the Saudi and Russian energy ministers, Khalid al-Falih and Alexander Novak, had been “joined at the hip” for two days through Thursday’s developments.
“They will reunite next week for the St. Petersburg forum; this budding ‘bromance’ marks a clear policy shift on the Russian side,” Ms. Croft said.
“Just two years ago, Novak took to the stage at the OPEC seminar and firmly ruled out co-operation with the organization and even questioned its relevance in the face of U.S. production,” she added.
“Both al-Falih and Novak denied that non-oil market factors (mainly the planned IPO of Saudi Aramco and the March, 2018, Russian elections) played any role in their decision to keep the cuts going until April. However, we continue to contend that they likely did influence the men that they both work for.”
Commodity strategist Michael Tran, Ms. Croft’s colleague at RBC, said the deal should help anchor oil prices in the low $50-a-barrel range, with the potential for West Texas intermediate, the U.S. benchmark, to move to the mid– to high-50s in the second half of the year.
“Months of blatantly clear, global stock draws and prices back in the high $50-a-barrel range may incentivize financially fragile countries to float additional barrels,” Mr. Tran said.
“Alternatively, compliance fatigue could set in if months of status quo strong compliance fails to draw down stubborn inventories and U.S. production continues to surprise to the upside, leaving prices stuck in neutral,” he added.
“Commitment from the cartel is steadfast but sentiment remains fleeting. Only once there is unequivocal evidence of firming fundamentals can OPEC fully regain the narrative.”
Markets at a glance
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