Wednesday, June 3, 2020

Asia Times: Crude oil prices gain on optimism for OPEC+ members to extend record level production limits

Tags
  • Dollar
  • Gold
  • Yen
  • Stocks
  • Oil
  • RBA
  • Bank of Canada

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Market Recap: Crude oil prices gain on optimism for OPEC+ members to extend record level production limits

Stocks in the US closed Tuesday's trading session higher as investors look past the ongoing protests in the US and continue to price in an economic recovery and recovering oil prices. Energy sector stocks led gains in the S&P500, followed by the materials and industrials sectors likely thanks to more optimism for a recovery in manufacturing sectors. A Bloomberg report citing people familiar with the situation implied that Russia and other OPEC+ members were favoring a one-month extension of output cuts at the next meeting likely helped rally energy stocks as well, although there was no official reports regarding the matter..

In company news, ride sharing company, Lyft Inc, said that demand for its ride sharing services had recovered over the past few weeks as lockdown restrictions were eased. Demand was however, still 70% lower compared to a year ago despite a 26% increase from April. Lyft's statement likely helped drive sentiment as well by further solidifying that April was likely the bottom of the economic demand. Its shares rose more than 4% in after-hours-trading on Monday, but ended Tuesday 2.79% lower as protests in the US weighed on the company’s stock price, highlighting the negative impact on a company level of the ongoing demonstrations in the US.

Indexes Daily Change (%) Net Change Closing Price
Dow Jones +1.05% +267.63 25,742.65
S&P500 +0.82% +25.09 3,080.82
Nasdaq +0.59% +56.33 9,608.38
*Source: Bloomberg

In the forex market, commodity-related currencies led gains for the second day in a row as financial markets became more optimistic of a global economic recovery. The dollar fell against almost all major currencies with the exception of the Swiss franc and Japanese yen. The Australian dollar led gains among major currencies for the second day, after the Reserve Bank of Australia (RBA) kept its monetary policy on hold and had a slightly more positive outlook for the Australian economy compared to its last meeting. RBA Governor Philip Lowe said during his statement following the decision that it was possible that the depth of the downturn will be less than previously expected, further fueling investor optimism. But with Q1 GDP figures releasing this morning, they may be some downside for the Australian dollar since downside risks might favor a sharper-than-expected decline in economic activity due to lockdowns towards the end of the quarter. The strong two-day rally may also increase the likelihood of the Australian dollar normalizing back down in the short-term, while the long-term outlook for the currency may also be tilted downside as the RBA is likely to be concerned with an increasingly stronger currency impacting exports.

The Canadian dollar may continue to rally with the Bank of Canada's (BoC) monetary policy meeting today. No changes to monetary policy are expected from the central bank as Governing Council officials are likely to lean towards waiting on more economic data before deciding on additional measure if needed. Risks for the Canadian economy also remain mostly similar to its previous meeting in April, with low oil demand and the Covid-19 pandemic likely being the main concerns. With monetary policy likely to be on hold while the Canadian economy starts to show some recovery from April and May, and with oil prices starting to recover, there may be some room for more upside for the Canadian dollar later today. In addition, with today's monetary policy meeting being the first for new Governor Tiff Macklem as previous Governor Stephen Poloz stepped down on Tuesday, the Canadian dollar is likely to experience slightly higher volatility during Macklem's opening statement as traders look for possible signals for the future of Canada's monetary policy with Macklem at the helm.

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Safe haven assets fell across the board on Tuesday, highlighting the optimism in financial markets. Gold fell while the yen dropped 1.01% against the dollar to its lowest close in almost a month. US Treasuries fell across the board, pushing benchmark 10-year yields 2.6bps higher to 0.69%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold -0.68% -11.85 1,727.70
Silver -1.28% -0.24 17.79
JPY -1.01% -1.09 108.68
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.6 0.16%
10-Year +2.6 0.69%
30-Year +3.7 1.49%
*Source: Bloomberg

Oil futures surged as speculation rose thanks to the Bloomberg report signalling that Russia and other OPEC+ members might be favoring a one-month extension to the current level of production limits. Both Brent and WTI crude oil futures rose more than 3% on Tuesday as investors became more optimistic for an extension to the current production limits. While risk that OPEC+ members will decide not to extend the production limit is still present, the likelihood for that at the current price of crude oil remains low. The US shale oil industry is also experiencing some recovery with crude oil prices, as multiple shale oil producers in the US expressed that plans to restart production in the near future are already in place. This effect will likely amplify further if crude oil prices continue to climb since more shale oil producers will start to become profitable again.

Oil Futures Daily Change (%) Net Change Closing Price
Brent Crude +3.26% +1.25 39.57
WTI Crude +3.87% +1.37 36.81
*Source: Bloomberg

In Asia, stocks look set to track gains in the US on Wednesday morning but may face some pressure from services sector data releasing today. The Nikkei and KOSPI were trading close to 2% higher, while the ASX200 gained 0.78% in the first hour of Wednesday’s trading session. Futures tracking major indices in the US were also in the green as of 8.29am (GMT +8). But equities may face some headwinds today with the amount of economic data releasing today. Services PMI data for China and the US may have some downside surprise to optimism since the services sector has been more heavily impacted as compared to the manufacturing sector. Labour market data in the US is likely to continue to highlight the high levels of unemployment in the country as well, although it has likely bottomed out in April.

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei Index +2.01% +447.91 22,755.94 8:18:05 AM
KOSPI Index +1.92% +40.11 2,123.48 8:38:00 AM
ASX200 Index +0.86% +50.21 5,878.20 8:37:45 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.39% +101.00 25,800.00 8:29:52 AM
S&P500 Futures +0.27% +8.25 3,085.25 8:29:55 AM
Nasdaq Futures +0.23% +22.00 9,670.50 8:29:52 AM
*Source: Bloomberg

Economic releases for the day ahead include (all timings in GMT +8):

  • Australia Q1 GDP (9.30am)
  • China May Services PMI (Caixin) (9.45am)
  • Switzerland Q1 GDP (1.45pm)
  • Germany May Unemployment Rate (3.55pm)
  • US May Private Employment Change (ADP) (8.15pm)
  • BoC Monetary Policy Decision (10pm)
  • US May Non-Manufacturing PMI (ISM) (10pm)