Market analysis: momentum in crude oil to subside

Oil markets rallied to close September higher following a proposed output-limiting cut by Opec. While the announcement comes as a surprise to many, its significance on prices will be muted.

Opec, which pumps 40 per cent of the world’s oil, agreed to reduce daily output to between 32.5 million and 33 million barrels per day. The last time it made such a cut was in 2008. And while it remains to be seen if this commitment will be ratified in full during its meeting next month, assumptions are that the group will deliver.

In June, Opec was producing in excess of 32 million bpd. A cut to the lower end of 32.5 million bpd means a drawdown of about 750,000 barrels at the ­lower end of production targets – a mere drop in the ocean of global crude supply.

With the market still stuck in an oil supply glut – the OECD nations’ strategic petroleum reserves sat at their highest levels of 3,093 million barrels as of June, and Russia currently pumping at record levels of 11.1 million bpd, the proposed Opec cuts will be bullish for crude prices in the short term, but the momentum will not last.

Dubai Gold & Commodities Exchange’s (DGCX) WTI crude contract closed September above US$48 per barrel, more than 7 per cent up on the month.

DGCX’s WTI crude contract should solidify above $40 levels, which now becomes a key support level, while upsides will be capped at $52 in the short term.

In the equity segment, volatility returned to European markets spurred by the continuing uncertainty at Deutsche Bank.

Following the $14 billion fine by the US justice department, the bank experienced large capital outflows as several key clients and hedge funds pulled their funds.

While liquidity will become a concern for the bank, and in the event that it cannot issue more shares to recapitalise, the struggling lender can still turn to the European Central Bank, which has monetary tools for a cash ­injection.

The Dax index in Frankfurt recovered and pared more than 2.4 per cent of its previous losses on Friday – and investors will keep an eye on developments at the German lender.

Across the pond, the Federal Open Market Committee as expected kept US benchmark interest rates unchanged – how­ever, supporting comments gave perhaps the strongest indications of a rate hike this year.

After holding rates unchanged at between 0.25 and 0.5 per cent, Janet Yellen, the Federal Reserve’s chairwoman, forecast that there would be at least one rate hike this year on the back of an improving US data docket.

With the Fed next set to convene on November 2 and decide on rates, markets will remain sensitive to US data releases and to the comments of various Fed officials who will be speaking around the US this month.

Immediate attention turns to the US non-farm payrolls report due on Friday. Expectations are for gains of 170,000 last month with the overall unemployment rate expected to be unchanged at 4.9 per cent.

A figure below expectations will hinder US dollar forecasts and vice versa.

The bad news is good news theme – which seems to be ­dictating market sentiment. As a result, the Fed, will continue until the first rate hike ­materialises.

We expect the greenback to remain volatile through October with a slight bullish bias, and expect the Dollar Index (a measure of the value of the dollar against a basket of major currencies including the euro, British pound, yen, Canadian dollar, Swiss franc and Swedish krona) to find strong support at 94 levels with resistance at 98 levels in the month ahead.

Gaurav Kashyap is the head of futures at Axitrader in Dubai

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