06 January 2021

Crude Oil Spikes Almost 5% On Saudi Output Cut

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News shaping
the markets today

     

What’s happening: Crude oil prices surged around 5% on Tuesday after the OPEC+ (Organization of the Petroleum Exporting Countries and allies) meeting finally concluded with an agreement.

What happened: Following a two-day OPEC+ meeting, Saudi Arabia surprised markets with its decision to voluntary lower output by 1 million bpd (barrels per day).

The decision sent crude oil prices past the $50 mark for the first time since February 2020. Rising geopolitical tensions following the seizure of a South Korean vessel by Iran’s Revolutionary Guards also supported oil prices. However, some risks persist for the oil market.

Why it matters: The OPEC+ group has agreed in December to ease its production cuts by 500,000 bpd from January, bringing the total output cuts to 7.2 million bpd. The group announced plans to hold meetings every month to decide on the next month’s quota.

The OPEC+ group resumed talks on Tuesday after ending Monday’s meeting without any agreement around February’s oil production levels, as Russia and Kazakhstan resisted the rollover of existing output quotas to the next month.

The cartel, of which Saudi Arabia is the de facto leader, agreed on Tuesday to allow Russia and Kazakhstan to raise oil production by a combined 75,000 bpd in February and March. Saudi Arabia agreed to cut output to prevent an oversupply in the oil market.

Since Tuesday's decision will apply for both February and March, the OPEC+ will next meet on March 4 to determine April’s quota.

Meanwhile, oil markets continue to face uncertainties despite the rollout of covid-19 vaccines in various parts of the world, with the new strain of the virus resulting in a nationwide lockdown in the UK and restrictions in other countries. The mutation of the virus has already spread to the US, which has been witnessing a record surge in hospitalisations.

WTI (West Texas Intermediate) crude futures surged 4.9% to settle at $49.93 per barrel on Tuesday after exceeding the $50 level earlier in the session, while Brent crude closed higher by 4.9% at $53.60 per barrel.

Investor sentiment was also boosted by the American Petroleum Institute’s report released late Tuesday, showing a decline in US crude inventories by 1.7 million barrels to around 491.3 million barrels in the week to January 1.

What to watch: Markets await the EIA’s (Energy Information Administration) data on crude stockpiles today. US crude oil inventories are likely to decline by 1.271 million barrels in the latest week, following a 6.065 million barrel contraction in the week ended December 25.

Gasoline stockpiles are expected to rise 0.596 million barrels, while distillate inventories might also increase 2.38 million barrels last week.

Investors will continue to monitor rising covid-19 cases, as total cases surpassing 86.3 million worldwide.

The Markets Today

     

The Canadian dollar will be in focus today after recording gains in the previous session.

Context: The Canadian dollar traded higher versus the greenback on Tuesday, supported by the sharp rise in oil prices. The CAD/USD was also supported by weakness in the US dollar, which declined versus a basket of major currencies.

Details: The US dollar weakened as investors continued to monitor the Senate runoffs in Georgia. The greenback lost further ground after China raised its official yuan rate on Tuesday.

Prices of oil, which is one of the major exports of Canada, climbed sharply on Tuesday following the conclusion of the OPEC+ meeting and seizure of a South Korean vessel by Iran.

Global markets remained cautious, however, amid fresh lockdown restrictions in Europe following the spread of a new variant of the coronavirus. Investors also continued to monitor Senate elections in Georgia that will determine the new US President Joe Biden's ability to take decisions on future economic policies for the country. Meanwhile, Wall Street recorded gains on Tuesday after recording sharp losses in the previous session.

The CAD/USD settled higher at 1.2671 on Tuesday, after climbing to a near three-year high of 1.2661 in Monday’s session.

What to watch: Markets await Canada’s trade report on Thursday, with the all-important jobs data scheduled for release on Friday. Markets expect Canada to report job losses for December, after reporting gains for seven months. The unemployment rate is also projected to rise to 8.6% in December.

Other Markets: European trading indices closed mostly lower on Tuesday, with the German DAX 30 and French 40 down by 0.55% and 0.44%, respectively. However, the FTSE 100 added 0.61% in the previous session.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

What else to watch today

     

South Africa’s IHS Markit PMI, France’s inflation rate, consumer confidence, services PMI and composite PMI, Spain’s services PMI, Italy’s services PMI and composite PMI, Germany’s services PMI, composite PMI and consumer prices, Eurozone’s services PMI, composite PMI and producer prices, UK’s new car registrations, services PMI and composite PMI, Brazil’s services PMI and composite PMI as well as the US MBA mortgage applications, ADP employment change, composite PMI, services PMI and factory orders.

 

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