Oil prices rebounded on Monday, following the outcome of the OPEC and non-OPEC ministerial meeting in Russia. In an interesting turn of events, Nigeria volunteered to join May’s output-cut deal and cap its oil production at 1.8 mbpd once it reaches that level in a stable manner, from around 1.7mbpd in May. No similar deal has been struck with Libya, at least so far. Perhaps the most important development though, was that Saudi Arabia agreed to limit its oil exports at 6.6 mbpd in August, something that would mark a reduction of almost 1 mbpd from a year ago. In our view, this is a notable step towards rebalancing the market from the world’s largest exporter, as it demonstrates the nation’s commitment to supporting prices.
WTI traded higher yesterday, breaking above the resistance (now turned into support) barrier of 46.25 (S1) and now looks to be headed for a test near 46.85 (R1). The price rebounded after it hit support near the prior downside resistance line taken from the peak of the 25th of May, which keeps the short-term picture somewhat positive. A clear break above 46.85 (R1) is possible to target the key resistance zone of 47.55 (R2).
However, even though oil prices could remain supported over the next few days on the back of this positive sentiment, we doubt that this will develop into a longer-term healthy uptrend. Continued gains in prices would probably invite more US shale producers back into the market, something that could increase supply even further and thereby, put a lid on prices. The technical picture also supports that any recovery may be short lived. On the daily chart, we see that WTI is still trading within the downside channel that has been containing the price action since the beginning of February. As such, we would treat the short-term uptrend, or any possible extensions of it, as a corrective phase for now.
AUD consolidates ahead of key data and a speech by RBA’s Lowe
During the Asian morning Wednesday, Australia’s CPI data for Q2 will be in focus, while RBA Governor Lowe will speak a few hours later. The forecast is for the nation’s inflation rate to have ticked up to +2.2% yoy from 2.1% yoy in Q1, something supported by the Melbourne Institute inflation gauge, which rose to +2.3% yoy in June. Such an acceleration may enhance speculation regarding a rate hike by the RBA in the foreseeable future and thereby, bring the Aussie under renewed buying pressure on the news.
AUD/USD traded in a consolidative manner yesterday, staying within the sideways range between the support of 0.7900 (S1) and the psychological zone of 0.8000 (R1). However the prevailing path remains positive in our view and as such we would expect the rate to challenge once again the 0.8000 (R1) zone soon, where a decisive break could set the stage for extensions towards our next resistance of 0.8070 (R2). The catalyst for another leg north may be tonight’s CPI data. As for the bigger picture, as long as the rate is trading above 0.7800 (S3), which acted as the upper bound of the sideways range that had been containing the price action since the beginning of March 2016, the longer-term picture is positive as well, in our view.
Even though the outlook for AUD remains broadly positive, we would stay cautious for a possible correction overnight on Lowe’s remarks. If the RBA chief echoes similar comments to Deputy Governor Debelle and signals that the Bank is becoming uncomfortable with the recent rise in Australian yields as well as AUD appreciation, the Aussie could pull back.
Today’s highlights:
During the European day, Germany’s Ifo survey for July is due out. The forecast is for both the current conditions and the expectations indices to have declined slightly, something supported by similar declines in the ZEW prints for the month, as well as the drop in the nation’s preliminary PMIs. Even though a small tumble in the Ifo figures may be seen as somewhat discouraging news for the ECB, we doubt that such modest drops will be enough to materially alter the Bank’s policy plans.
From the US, we get the Conference Board consumer confidence and the Richmond Fed business activity indices, both for July. We also get the S&P/Case-Shiller house price index for May. However, none of these indicators is usually a major market mover.
