Oil prices surged earlier today, following reports that Saudi Arabia and Russia have agreed to extend November’s oil-output cut until March 2018, a 9-month extension from the 6 months widely discussed previously. Although they hinted at a longer-than-anticipated extension, they agreed to keep the quantity of the cuts the same as decided in November. With only 10 days left until the meeting between major producers in Vienna, we think that the near-term outlook of the precious liquid is to the upside. We believe that further optimistic comments from the various oil ministers regarding the prospect of an extension into 2018 is likely to keep oil prices supported heading into that meeting. In addition, any chatter that there can be deeper production cuts could lift prices further.
WTI edged north during the Asian day Monday, breaking above the resistance (now turned into support) barrier of 48.50 (S1) to hit the longer-term prior upside support line taken from the low of the 5th of April 2016. More optimistic comments ahead of the Vienna meeting could push it back above the aforementioned line. If so, we would expect the bulls to aim for the 49.90 (R1) resistance hurdle, where a decisive break is possible to open the way for our next resistance of 51.00 (R2).
As for the bigger picture though, we remain skeptical as to whether a major healthy uptrend can be established. Even if we get a better-than-anticipated deal in Vienna, continued increase in US production is likely to keep a lid on any gains oil prices may record in the aftermath of that meeting. Looking at the daily chart of WTI, we see the 51.50 – 55.00 range as the area where shale producers may be attracted to increase production.
Dollar slips after disappointing economic data
The US dollar slipped on Friday, following the release of the nation’s CPI and retail sales data for April. The figures were disappointing overall, with the core CPI rate surprisingly declining and the headline rate falling by more than expected. Meanwhile, both the headline and the core retail sales rates rose by less than anticipated, though last month’s figures were revised somewhat higher. As a result, the probability for a June rate hike declined to 74%, which in our view is still an elevated level considering that there are 4 weeks to go until that gathering.
Moving forward, we think that investors may pay extra attention to incoming US data. Encouraging numbers may be a reason for the hike probability to rebound again. However, considering it’s already at an elevated level, any upside reaction in USD may be relatively modest. On the other hand, further signs of softness in economic indicators could raise doubts as to whether the Committee will indeed act in June, and may thereby bring the greenback under renewed selling interest.
USD/CAD traded south during the early European morning Monday. However, the rate has been oscillating between 1.3645 (S1) and 1.3750 (R1) since the 5th of May and as such, we would consider the near-term outlook to be flat for now. Even if we see the rate breaking below 1.3645 (S1), as long as it remains above the key barrier of 1.3600 (S2), we prefer to maintain a flat stance. The 1.3600 (S2) territory acted as the upper bound of the larger wide range between that hurdle and the psychological zone of 1.3000, which contained the price action from September 2016 until April 2017. Therefore, there is still a decent probability for a rebound from near 1.3600 (S2).
Today’s highlights:
During the European day, the economic calendar is empty, with no major events or indicators due to be released. From the US, we will get the Empire State manufacturing and the NAHB housing market indices, both for May. We have one speaker on the agenda: ECB Executive Board member Peter Praet.
As for the rest of the week, on Tuesday, the main event will probably be the release of the UK CPI data for April. On Wednesday, we get the nation’s employment figures for March. On Thursday, during the Asian morning, Australia’s employment data for April are due out, while from the UK, we get retail sales data for April. Finally on Friday, Canada’s CPI data for April will be in focus.
WTI
Support: 48.50 (S1), 47.50 (S2), 46.00 (S3)
Resistance: 49.90 (R1), 51.00 (R2), 51.50 (R3)
USD/CAD
Support: 1.3645 (S1), 1.3600 (S2), 1.3530 (S3)
Resistance: 1.3750 (R1), 1.3790 (R2), 1.3850 (R3)
