OPEC+ decision moved the market. Increased oil prices prevent inflation worries from going away
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Surprise, surprise! OPEC cut its production by 1 mbpd yesterday.
The news fell like a bomb on Sunday. The barrel of American crude rallied past $81pb, jumped above the 50 and 100-DMA levels – which would otherwise acted as a decent resistance, and will likely be looking to challenge the 200-DMA offers, a touch below the $84pb.
Why did OPEC+ make such move? Officially, the cartel wants price stability in oil markets. But in reality, they simply want higher prices. As the Nigerian Minister of State for Petroleum Resources said: the group 'wants prices at around $90pb'.
Fair enough. From July, combined with Russia's own output cut as a result of a response to Western sanctions, the amount of oil barrels available for the global markets will be around 1.6 mio less.
That's enough to revive geopolitical tensions with the US – which already called the decision ill-advised, and more than enough to spur the inflation worries across the world.
What's the upside potential?
Is it possible that OPEC+ pushes the price of a barrel to $90 and keep it stable there?
What about a rise to $100pb?
Well, it's possible, but it will be hard. If the rising oil prices hit the global demand prospects at quite an uneasy time for the world economy (due to the bank stress) and further spurs recession worries, there is a chance that the rally in oil prices fades quickly.
The oil bulls' determination will depend on how much the OPEC+ is willing to push prices higher by cutting output. How much OPEC+ is willing to push prices higher will depend on whether the world economy could absorb higher energy prices.
The latest Caixin PMI data released in China this Monday revealed that manufacturing in China unexpectedly fell in March, to the 50 level, which is the limit between expansion and contraction.
If China can't boost global growth expectations, it will be hard to imagine a strong rally in oil prices to $90/100 range.
At this point, the 200-DMA will likely act as a solid resistance to the post-OPEC rally and oil prices could stabilize within the $75/80 range.
Shaky start to the week
The OPEC+ decision gave a shake to global financial markets, as – obviously, higher oil prices revived the inflation worries and the interest rate hike bets.
The US 2 and 10-year yields ticked higher in Asia – whereas the yields had fallen on Friday on the back of softer-than-expected PCE and core PCE figures from the US.
US futures are in the negative with Nasdaq futures leading losses, as a sign that a part of the Friday rally in US equities – which was triggered by softer inflation figures could easily be wiped out today.
But oil stocks will likely hail the decision.
In the FX
Revived hawkish Federal Reserve (Fed) expectations will likely reverse the selloff in the US dollar, and bring other majors under pressure.
But the Canadian dollar is in a good position to outperform the complex of G7. The USDCAD was already under the pressure of a softer US dollar over the past two weeks. Now, the oil bulls could take over, and push the pair below the 1.35 mark. The move could easily extend toward the 200-DMA, around the 1.3380 level.
Elsewhere, however, the broadly stronger US dollar won't be a gift for the others. The EURUSD already slipped below the 1.08 level in Asia. Cable is below 1.23 and gold tests $1950 per ounce to the downside.
