The Daily Update - Oil OPEC Fed

The big news at the weekend that Theresa May owns a £995 pair of leather trousers was overshadowed by news from OPEC. Saudi Arabia announced agreement for production cuts starting January with oil minister Khalid Al-Falih reporting that Saudi will ‘cut substantially to be below’ the target agreed last month. Brent rose to hit $57.89 up 6.4% in early trading and is now up around 20% from November when the agreement was first announced.

The agreement between OPEC and non-OPEC members, the first such agreement in 15 years, involves countries such as Mexico and Russia which pumps as much as 60% of the world’s crude, but excludes countries such as the US, China, Canada and Brazil. Analysts are assuming that with reasonable compliance with the agreement then the cuts will be enough to push the market into deficit next year creating stronger pricing.

Bond yields are up globally on the news with oil and gas companies gaining in Asia against a broader market fall. Not helping the bond market is the supply today and tomorrow as the US Treasury auctions off $20bln in a ten year note and $12bln in a thirty year bond just ahead of the Fed meeting with a rate hike expected on Wednesday evening.

With the rate hike 100% priced in by the futures market, focus of the market will be the forward guidance as to future hikes from the FOMC. Previously the so called ‘dot plot’ of the members expectations as to the speed and longevity of future hikes has been somewhat varied showing that the committee have yet to form a solid consensus regarding their baseline interest rate view. Now this is complicated by the lack of information regarding the new administration’s fiscal policy, which will equate to the FED members 2017-18 economic growth forecasts being highly vulnerable to revision until such time as further details of what President Trump will be able to put in place is known.

This may take a number of months, giving the Fed chair an extremely difficult period to manage the committee.