Oil traded higher on Wednesday in a very tight range until the rally midday NY; WTI attempted a clean push through $46, and Brent printed through $49 before retracing some.
Oil is at its highest level since early March, with vaccine-driven optimism and signs that an orderly transition of power in the US is underway helping the demand outlook. Positive comments on the state of the Chinese economy by Premier Li are also supportive.
The inventory numbers released earlier in the NY session helped push the market higher, with the EIA figures more bullish than the previous days’ API estimates and bullish to consensus.
As we count down to OPEC’s meeting on Nov. 30, the Axi Expert Series is pleased to welcome Henning Gloystein, Director of Energy, Climate & Resources at Eurasia Group, to discuss his views and insights in what’s an important week for oil markets.
Forex: All focus on Brexit and Energy
The next week could be decisive for Brexit, though there’s no hard deadline except for the end of the transition period on December 31, which cannot be moved. From my understanding, most of the agreement’s legal text seems ready, and chief negotiators Frost and Barnier will likely present what they have to their political headmasters next week. The question then will be whether the UK and EU leaders will agree on the remaining, most difficult ‘brackets.’ Markets seem to broadly anticipate a deal, suggesting that the knee-jerk market reaction could finally offer up the opportunity for the biggest wave of profit-taking on sterling the world might ever see.
The energy sector is going full out bonkers, the oil market rally is a huge positive tell, and it screams increasing optimism around the global 2021 outlook. Such an outcome would be consistent with the USD downside.
S&P Energy is still 15% lower than it was in June and down 35% on the year. Energy is always a favorite value and means reversion play. And with the month-end corporate dollar buying getting soaked up easily overnight in NY, the USD dollar downside should start to open up a bit more into year-end, provided energy holds an even keel and Brexit talks don’t fall off the table.
The medium-term outlook for the dollar is about as bearish as one could get. The analog to the 2009 post-GFC recovery remains the obvious historical comparisons. China’s credit creation leading to a V-shaped global recovery triggering reallocation of assets abroad from an overweight US position is about as clear a whistle to sell dollar signal as one could get.
For context, the Bloomberg Dollar Spot Index (BBDXY) dropped 16.5% off the highs in 2009 alone, while the dollar is only 12% off the highs this year, despite an arguably worse outlook. The surprisingly high efficacy of vaccines brings forward the timing of the full global recovery and, with it, equity inflows to the rest of the world. Also, the twin deficits have historically led to dollar declines, and the combination of a Yellen Treasury/inflation-targeting Powell reinforces the dollar downtrend.
It’s difficult to find a silver lining amid all the bearish clouds as gold prices continue to defend the key $1,800 level. It’s much of the same overnight, with transfer of ownership continuing into stronger hands. But with the inability to even reclaim $1,825, it’s hard to argue the downtrend does not remain in the play.
The positive correlation between gold and the SPX since March flipped after Pfizer’s vaccine announcement on November 9, while negative real yields are not having a positive effect on the precious metal. A transition from disinflationary to inflationary support for gold could take time and ultimately leaves prices vulnerable to more profit-taking and the establishment of more shorts in the near-term.