Oil gained the most in almost a year on expectation that OPEC+ could announce a further relaxation of its actual production-cut regime. OPEC countries meet today to decide whether and by how much they would loosen their production curbs, as the oil glut accumulated during the pandemic months is almost gone, and the second half of the year could see a sharp decline in oil reserves according to OPEC’s latest forecast, a decline that would comfortably surpass the 2021 average and create the need for extra oil pumping. That’s just a projection, but the end of the lockdown measures and speedier economic activity, prospects of improved global travelling should indeed increase the global demand for oil. The market expectation is a gradual and cautious decrease in OPEC+ production cuts, especially given that Iran is waiting in ambush for to its sanctions to be lifted in the next couple of weeks and for ramping up its own production. Bloomberg says the Iranian production could go up to 4 million barrels per day, but Iran International claims they could go up to 6.5 mbpd. Saudi, on the other hand, is willing to take things easy and not jeopardize a year worth of efforts to pull oil prices back at where they stand today.
US crude is a touch below $68 per barrel, while Brent crude is trading above the $70 mark. From a technical standpoint, trend and momentum indicators hint that there is no particular urge for a downside correction at the current levels. If the OPEC news please, we shall see a further advance towards the $70 pb, where brutal bulls will be likely fighting some weakened bears.
Many traders start wondering whether we could see the barrel of US crude advance to $100. Probably not just yet. A too rapid rise in oil prices would add on top of the worrying inflationary pressures and jeopardize the economic recovery. Therefore, although the risks are tilted to the upside, the medium-term recovery in oil prices should be balanced and gradual.
With firmer oil prices, one could expect the oil companies do slightly better this week, especially after last week’s environmental and regulation drama that urged big oil companies to step up efforts to save the planet and weigh on their stock prices.
On the index level, FTSE is well-positioned to benefit from firm oil prices, but the stronger pound is threatening gains above the 7000p level. The FTSE 100 should also benefit from the global reflation theme. The bank-and-energy heavy FTSE should surf on the business reopening, rising inflation, prospects of tighter monetary policies, higher rates, tapering.
Elsewhere, the US markets are set for a sideways start after a long weekend, and despite the reflation pressures, we shouldn’t see a meaningful selling pressure on tech stocks, nor a rally to fresh historical high levels before Friday’s jobs report.
Elsewhere, the rising inflation is a boon for gold prices, and the yellow metal consolidates above the $1900 per oz. But for the gold rally to maintain its actual speed, the US yields should remain subdued. And that’s not a given before this Friday’s US jobs report and next week’s US inflation report. On one hand, Jay Powell and the Fed officials insist that the inflation peak shouldn’t last long. On the other hand, investors are scratching their heads on what would magically ease the actual inflationary pressures: commodity prices soar, oil is now joining the bull party, chip shortages, slow global logistics and improved economic activity can only boost consumer prices. Therefore, there is a chance that at some point, we start seeing a significant rise in the US yields. It’s just a matter of time before we see the 10-year yield jump past the 2% level. If that happens, we should see the gold rally fading from the actual levels, despite rising inflation expectations.
And Bitcoin is not the place to be for those looking to hedge against inflation. Bitcoin seems to stabilize near the $35K, that’s still below the 200-day moving average and I believe that the next record run in Bitcoin is not around the corner. Risks remain tilted to the downside.
