The week starts on negative sentiment as Friday’s jobs report couldn’t prevent the selloff from extending in the US. And more importantly for the Europeans, Gazprom didn’t restore gas flow to Europe on Saturday, as planned.
Gazprom said that a leak was detected, and that the pipeline could not operate before it’s fully repaired. But of course, the decision suspiciously came slightly after the G7 countries agreed to impose a price cap on Russian oil, probably around the Russian production cost. It’s unsure whether the plan would work, as there are doubts that some of Russia’s big clients like China, India, or even Turkey would follow G7 in this unprecedented decision. But they may have to, as most of the world’s oil is transported by Western shipping companies, and if they can’t transport the Russian oil anymore – unless people pay the price that Europeans want them to, there would be no oil for them. It will be interesting to watch and see how, and if Europeans could cook the market to their sauce. Russia already said they won’t sell their oil to countries who are not willing to pay the full price, which is fair enough.
The barrel of US crude ended up last week below the $90 mark, while interestingly the TTF futures closed the week having lost nearly 40% since the historical peak a week earlier. But the risks remain tilted to the upside.
Today, investors will be closely watching the OPEC meeting, as Saudi now threatens to cut the oil output to push prices higher, but according to WSJ, Russia doesn’t want another round of output cut.
And Russia is not the OPEC’s only geopolitical headache. There is also the possibility of a nuclear deal between the US and Iran, that titillates the Saudis. OPEC doesn’t want to see around 4 mio barrels of Iranian oil hitting the market, and pulling prices lower. Therefore, they could well use the excuse of an eventual deal to cut output, again.
All in all, this means that even if the demand side us pushing crude prices lower, OPEC wouldn’t let the prices drop too much below the actual levels. Of course, no output cut should send the price of crude back to $85pb. Yet, if OPEC announces another wave of output restrictions, the price of a barrel could jump back to $100 and above.
Euro under pressure
On the FX front, the deepening energy crisis continues weighing on the euro. The EURUSD continues pushing lower before parity this Monday and is testing the 0.99 support at the time of writing, with more chance of breaking this support in the coming hours than the contrary. This week is important for euro traders, as the European Central Bank (ECB) is expected to announce a sizeable rate hike at its Thursday’s policy meeting. Many traders now expect a 75bp rate hike from the ECB this week, while some continue bet on a 50bp hike, on the idea that the ECB cannot carry on jumbo rate hikes, when the Eurozone is threatened by deepening energy crisis, and a sharp fall in economic activity. But the eurozone is also struggling with skyrocketing inflation, argue the hawks.
In all cases, the ECB hawks don’t really matter for the pricing of the euro against the US dollar, and the stronger dollar keeps worsening the energy bills on the continent.
The next UK PM
And it’s also an important day across the Channel, as the Brits will get to know who their next PM will be.
The polls point steadily and increasingly at Liz Truss, unfortunately for the pound, as a Truss victory will push the Bank of England (BoE) expectations into a chaos, as she wants to scrap inflation as the monetary policy target and rely on another metric, like growth for example.
Along with tax cuts, and extra spending to freeze the energy bills for example, the UK’s sputtering macro metrics could be further fuming in the coming quarters under Truss leadership.
Cable kicked off the week below the 1.15 mark. But we could see some profit taking and a ‘sell-the-fact’ rally in sterling when Liz Truss victory is confirmed.
Still, the pound is expected to continue its journey toward parity against the US dollar, as the dollar continues rising relentlessly. The dollar index is already up by more than 0.50% this morning.
