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Trends & Analysis
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Oil burns brighter after Saudi Arabia’s decision

 

Wednesday, September 06, 2023

Today’s headlines

What’s happening: Crude oil settled higher on Tuesday, after trading lower earlier in the session.

What happened: Weak economic reports from China raised concerns around the global demand for oil, exerting pressure on oil prices in early trading on Tuesday.

However, Saudi Arabia’s announcement around its voluntary output cuts supported investor sentiment for crude.

Why it matters: Both oil benchmarks ended last week on a strong note. WTI crude oil gained more than 7%, while Brent climbed 5.5%. Both closed Friday’s session at their strongest levels since November 2022.

Traders began Tuesday’s session by shorting oil, following downbeat data from the world’s second-biggest economy. The Caixin China general service PMI fell to 51.8 in August, from 51.9 in the prior month. The figure also missed market estimates of 53.6 to record the softest rise in services activity since the beginning of the year.

The HCOB Eurozone composite PMI came in at 46.7 in August, lower than the preliminary reading of 47 and signalling the biggest contraction in the region’s private sector activity since November 2020.

Investor sentiment for oil improved significantly after Saudi Arabia announced plans to extend its voluntary oil production cuts of 1 million barrels per day (bpd) for three months, until the end of the year. Russia has also extended its voluntary reduction in oil exports by 300,000 bpd until yearend.

According to the latest data from the EIA (Energy Information Administration), gas demand rose to 9.068 million bpd last week, while gasoline stockpiles fell by 214,000 to 217.412 million barrels.

WTI crude for October delivery gained $1.14 to close at $86.69 per barrel on the NYMEX (New York Mercantile Exchange) on Tuesday. November Brent crude climbed $1.04 to settle at $90.04 per barrel on ICE Futures Europe.

In other energy trading, wholesale gasoline for October delivery declined 1 cent to $2.58 a gallon, while October heating oil added 11 cents to $3.22 a gallon and October natural gas declined by 19 cents to $2.58 per 1,000 cubic feet.

What to watch: Traders await the release of the API’s (American Petroleum Institute) data on crude oil stockpiles. US crude inventories contracted by 11.486 million barrels in the week ended August 25, after a decline of 2.418 million barrels in the prior week.

Markets will also watch the release of the EIA’s data on crude oil stockpiles on Thursday.

The markets today

The Canadian dollar will be in focus today ahead of the Bank of Canada’s interest rate decision

Context: The CAD/USD forex pair moved higher on Monday, as traders awaited the Bank of Canada’s policy decision.

Details: The Canadian currency plummeted the most in one month versus the US dollar on Friday, after traders reduced expectations of the Canadian central bank raising interest rates following the release of economic data.

Canada’s GDP fell at an annualised rate of 0.2% in the second quarter, compared to expectations for 1.2% growth. The S&P Global Canada manufacturing PMI also declined to 48.0 in August, to record its weakest level since June 2020.

Strength in the US dollar exerted further pressure on the CAD/USD forex pair on Tuesday. The US dollar index, which measures the greenback’s performance versus a basket of major peers, gained more than 0.5% to 104.81.

A rise in the prices of crude oil, one of Canada’s major exports, also failed to provide support to the loonie on Tuesday. WTI crude oil prices jumped $1.14 to settle at $86.69 per barrel.

The CAD/USD forex pair fell around 0.4% to 1.3642 on Tuesday. The S&P/TSX Composite index also declined by 0.64% to settle at 20,413.76 on the first trading session of the week.

What to watch: Traders await the Bank of Canada’s interest rate decision today. The BoC, which hiked the target for its overnight rate by 25bps to 5% in July, is expected to keep rates unchanged at today’s meeting.

The release of other economic reports will also remain in focus today. Canada had recorded a trade deficit of C$3.73 billion in June and is expected to report a deficit of C$4.25 billion for July. Analysts expect labour productivity in Canadian businesses to decline by 0.3% in the second quarter, following a 0.6% decline in the prior quarter.

Other Markets: US trading indices closed mostly lower on Tuesday, with the Dow Jones index and S&P 500 down by 0.56% and 0.42%, respectively, and the Nasdaq 100 up by 0.11%.

The news shaping the markets

US National Security Adviser Jake Sullivan warned North Korea of having to “pay a price” if it provides weapons to Russia. Despite the geopolitical tensions, the safe-haven US dollar index traded lower this morning.


Australia’s economy grew by 0.4% in the second quarter, above market expectations of 0.3% growth, lending support to the AUD/USD forex pair.


Colombia’s producer prices fell by 3.03% year-over-year in August, after a record decline of 6.55% a month ago, which sent the COP/USD pair lower in forex trading this morning.


Brazil’s industrial production declined by 0.6% in July. The figure being higher than market estimates of a 0.3% decline exerted pressure on the BRL/USD forex pair.


Qatar Financial Center PMI edged lower to 53.9 in August, from 54 a month ago, sending the QAR/USD pair slightly lower in forex trading this morning.

What else to watch today

Germany’s factory orders and construction PMI, Eurozone’s construction PMI and retail sales, France’s construction PMI, Italy’s construction PMI, UK’s construction PMI, Russia’s total vehicle sales, US MBA mortgage applications, balance of trade, Redbook index, services PMI, composite PMI, ISM services PMI, IBD/TIPP economic optimism index, total vehicle sales and Fed Beige book, as well as India’s money supply M3.


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