Expect OPEC Production headline to stay overstated
Today in Vienna, OPEC and non-OPEC oil producers will discuss ramping up oil production. The stars seem to be aligned: discord with Iran has eased, while Russian and Saudi Arabia are supporting the move. Accordingly, the market reacted, as Brent and West Texas Intermediate (WTI) fell by -2.26% and -1.03% to USD 73.98 and USD 66.32 respectively. Year-to-date, Brent and WTI are up +11.09% and +9.84.
But we think the market has overreacted. Expectations of 1-1.5 million barrel/day increases are too optimistic. We expect effective increases to be more like 600’000 b/d. Spare capacity is thin, while Venezuela and Angola are crippled by economic instability and investment neglect of the last years. Therefore, Brent Crude and WTI downward moves are overstated, as demand from China and India remains strong.
Summer Friday
The World Cup is on, it’s sunny and it’s Friday. Don’t expect a lot of action in equities or in Forex. Still, markets have a lot going on in the background. Yesterday saw a profit warning from Daimler – highlighting the risk of a US-China-EU trade war. Volatility in oil prices caught up to the energy sector. Emerging market currencies staged a marginal recovery, but trading felt like profit taking. Mexico increased rates by 0.25% to 7.75%, a proactive response to extreme MXN weakness ahead of Presidential elections and increasing NAFTA tensions. The Swiss National Bank stayed defensively dovish, repeating that the CHF is highly valued, and the Forex market remains delicate. With the USD on the defensive, GBP gained as the Bank of England sounded hawkish as to an August rate hike.
