OPEC Makes a Surprise Deal

Oil prices jumped Wednesday after OPEC leaders announced a surprise deal to bring back production quotas. The Canadian dollar was the top performer while the yen lagged. Japanese retail sales are due up next.

النفط و العملات بعد الحوار الأول (للمشتركين فقط)

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As we feared yesterday, the gap closed enough among OPEC members to reach a consensus on production quotas. WTI crude oil jumped $2.26 to $46.95 in response.

Moments before the informal meetings began, Algeria's oil minister said no deal was coming but that proved to be selective misinformation.

After five hours of meetings, OPEC released a statement to say production will be capped in the range of 32.5 mbpd to 33.0 mbpd. That's down from the August level of 33.2 mbpd.The caveats are that a committee will be formed to decide on production levels and that it won't be adopted until the Nov 30 meeting.

There is an element of smoke-and-mirrors here because in May OPEC was producing at less than 32.5 mbpd but countries – especially Saudi Arabia – have been inflating numbers in anticipation of a freeze or a 'cut' like this. Also, this is seasonally the peak of production in the Middle East so what looks like a reduction still means they're pumping at the maximum.

Still, if the deal is finalized it's a freeze at worst and that's more than was expected Wednesday. WTI broke above the downtrend since June in response and USD/CAD fell more than 100 pips to back away from the 200-dma.

The enthusiasm for the deal could fall apart on how production is measured or exemptions to Iran, Libya and Nigeria but for now it's good for oil prices and will likely support them further in the days ahead.

OPEC was far from the only thing on the agenda Wednesday. Yellen sounded more dovish than her FOMC press conference as she underscored that the Fed has time to allow employment to grow further before worrying about inflation. Draghi repeated his wait-and-see mantra on previous programs while imploring European  governments to take up the stimulus mantra.

The main economic data point was durable goods orders. Core orders rose 0.6% compared to -0.1% expected but that was a total mirage as the prior was revised down to +0.8% from +1.5%. A soft shipments reading also ensures that GDP estimates for Q3 will tick lower.

Overall in FX the moves were modest but it may take some time to digest all the political, geopolitical and economic balls in the air. USD/JPY tracked slightly higher to 100.70 and will be in focus with Japanese retail sales due at 2350 GMT. The consensus is for a 0.6% m/m drop after a +1.4% reading in July. There is already talk of a BOJ cut to -0.30% in October.