Today, the highly anticipated meeting between major OPEC and non-OPEC oil producers will take place in Vienna. Recent comments from the oil ministers of Saudi Arabia and Russia suggest they have agreed to extend the November oil-output cut deal until March 2018, an extension of 9 months at the current volume of 1.8 mbpd. Ever since those remarks, many other OPEC oil ministers have expressed their support for a 9-month extension as well. Bearing this in mind, we think that most, if not all, of the good news are probably already priced into oil, evident by the recent surge in prices. As a result, if we only get a 9-month extension, we see further upside in oil as likely being limited. In order for oil prices to rally significantly from current levels, we believe that producers have to deliver something over and above what the market currently expects, namely an extension of a full year and/or deeper cuts in production.
WTI traded somewhat higher yesterday, after it hit support near 50.60 (S1) on Tuesday. During the European morning Thursday, the price looks to be headed for a test of the 52.60 (R1) resistance hurdle. In case the producers deliver a full-year extension or deeper cuts, WTI could surge above 52.60 (R1) and initially aim for the 54.00 (R2) territory. A clear break above that zone could pave the way for the next resistance of 54.80 (R3). On the other hand, a potential disappointment, like an extension of only 6 months, could trigger a pullback in oil prices. In such a case, we expect the bears to seize control and push the price lower towards 50.60 (S1), where a decisive break could set the stage for the next support at 49.90 (S2).
Bank of Canada stands pat, maintains a neutral tone
The BoC kept its policy unchanged yesterday, as was widely expected. The tone of the meeting statement was neutral overall, indicating that although uncertainties continue to cloud the Canadian outlook, the economy’s adjustment to lower oil prices is almost complete and recent economic data such as business investment have been encouraging. Perhaps due to the absence of any really concerned comments by policymakers, the Canadian dollar gained on the decision. In case the OPEC and non-OPEC producers deliver something more than the market expects, the currency could come under renewed buying interest.
USD/CAD dipped yesterday from near 1.3540 (R3) following the BoC decision, and then declined even further after the FOMC minutes, to break below the support (now turned into resistance) barrier of 1.3410 (R1). Considering the BoC’s neutral outlook, the battered US dollar, and the prospect of a deal that boosts oil prices, we think that this decline could continue. An initial break of the 1.3360 (S1) zone could trigger further downside extensions towards the 1.3310 (S2) support territory.
FOMC minutes: Prudent to wait for evidence that GDP slowdown is transitory
The FOMC minutes from the May policy meeting had a neutral tone overall in our opinion, with every hawkish comment being balanced with a cautious remark. For instance, most participants judged that if economic data came in more or less in line with their expectations, then another rate hike “would soon be appropriate”. However, they also judged it would be prudent to wait for evidence that the recent slowdown in GDP was transitory before taking any further action. The US dollar declined alongside US treasury yields, but interestingly enough, the probability for a June rate hike remained elevated at 83% according to the Fed funds futures. Moving forward, we expect the market to shift its attention to incoming US data as well as Fed speakers. In that respect, Fed Board Governor Brainard’s remarks today may be closely followed, for any hints as to whether she will support a hike at the coming meeting.
As for the rest of today’s highlights:
During the European day, the UK will release its 2nd estimate of GDP for Q1. The forecast is for the 2nd reading to be in line with the preliminary figure and confirm that economic growth slowed notably from Q4. In such a case, we expect market participants to turn their focus to the other important aspect of the 2nd estimate: business investment. Investment surprisingly declined in Q4, generating concerns that the first real impact of Brexit-related uncertainties had shown up, as firms appeared hesitant to invest in the UK ahead of the impending Brexit negotiations. We expect investors to look at the Q1 print in order to determine whether this was a one-off, or if Brexit jitters have already began to weigh on GDP growth. The consensus is for the investment rate to have rebounded, but only marginally so. Another soft print could enhance the aforementioned concerns and thereby, prove negative for sterling.
Besides Fed Board Governor Lael Brainard, we will also hear from ECB Vice President Vitor Constancio today.
WTI
Support: 50.60 (S1), 49.90 (S2), 48.40 (S3)
Resistance: 52.60 (R1), 54.00 (R2), 55.00 (R3)
USD/CAD
Support: 1.3360 (S1), 1.3310 (S2), 1.3260 (S3)
Resistance: 1.3410 (R1), 1.3460 (R2), 1.3540 (R3)
