Intraday Market Thoughts

Will Oil Shorts Think Twice?

by Adam Button
Feb 22, 2016 23:11

Crude prices gained more than 6% on Monday after Russia and Saudi Arabia agreed to freeze prices at current levels. The pound finally found buyers in US trading but it was still easily the laggard on the day while the Aussie led on broad commodity strength. The Asia-Pacific calendar is light. The GBPJPY short trade of the Premium Insights was closed with a 272-pip gain, leaving five trades in progress. The Video Analysis of existing and upcoming trades has been posted and sent to Premium subscribers.

Will Oil Shorts Think Twice? - Video Arabic Snapshot Feb 22 (Chart 1)

There is no easier commitment than a promise to do something that was already planned. Russia and Saudi Arabia pledged not to increase production even though neither had any designs to pump more.

Still, the announcement lit a fire under the oil market despite what was probably a more-important announcement from the IEA. They said the global surplus in production will last into 2017. Earlier forecasts had focused on mid-2016 as a time when the balance would begin to tip. Shale has proven remarkably resilient and over-supply remains the dominant theme.

S&P unleashed a fresh round of downgrades to major oil producers but there has been a remarkable lack of bankruptcies and shutdowns throughout the global energy market. So long as the market remains in surplus, sellers will limit oil bounces.

OPEC Secretary General tried some fresh jawboning, saying that if the freeze is successful, perhaps it will trigger some other action. He also said the days of OPEC cutting alone are over. With today's deal, however, OPEC now head to the sidelines and that removes a risk for oil shorts.

The main positive for oil has been increasingly positive market sentiment. Fears about the US and China are overstated and the economic data hasn't backed up the kind of rout we've had to start the year. On Monday, the Chicago Fed national activity index rose to +0.28 from -0.34.

Look for the next phase in markets to be more selective of winners and losers, rather than a wholesale de-risking. The main loser in the US economy will be manufacturing and exports due to the strong dollar. That was underscored by the Markit manufacturing PMI at 51.0 compared to 52.5 expected.

In Europe, the case for ECB action in March received a lift after Finnish hawk Liikanen said they are ready to do more next month. So far, 1.1000 has held and that's the key level in the days ahead.

Iron ore climbed 6.2% to $51.52/ton. Other industrial metals also made solid gains while gold fell 1.4% to $1208. The Australian dollar took advantage in a rally to 0.7248.

The pound remains the top story with the Brexit saga at the forefront. Sellers were finally exhausted after a fall to 1.4052 and the pair bounced 100 pips but it was still one of the worst days for GBP since the financial crisis.

At the moment, the polls and overly-dramatic UK press headlines are more important than the vote or the consequences. Expect many twists and turns over the next four months.

Act Exp Prev GMT
Markit Manufacturing PMI (FEB) [P]
51.0 52.0 52.4 Feb 22 14:45
Chicago Fed National Activity Index (JAN)
0.28 -0.34 Feb 22 13:30

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