Brent prices subdued ahead of OPEC meeting

Thursday, December 03, 2015

Front month Brent futures slid close to levels last seen during the financial crisis as investors took a bearish stance ahead of tomorrow’s OPEC meeting. Prices traded sharply lower yesterday, losing 4.2% and trading back down towards August lows as they closed just below $44.50/bbl yesterday. The majority of market participants expect the group to hold their production unchanged at around 31m bpd but some analysts argue that production could be increased to as much as 33m bpd. Of course any surprise increase in production would be seen as very bearish for crude oil prices and while we see the potential for spikes higher on rising geopolitical tensions in the Middle East as the West  escalate airstrikes in Syria, these gains may be short lived as investors remind themselves of the substantial supply overhang.

Expectations for a Fed interest rate rise this month increased after Janet Yellen gave her strongest hints yet. The Fed chair commented that the economy had “recovered substantially” from the post crisis recession and was strong enough to support a rate hike. Economic data out yesterday offered further support to this bullish outlook with ADP employment statistics indicating the strength of the labour market, with 217K roles added in November against expectations of 190K additional jobs. Today’s release of initial weekly jobless claims, continuing claims, durable goods orders as well as services and composite PMI data will all be watched closely with market participants encouraged by any continued growth in the labour market. The dollar index hit a fresh twelve year high yesterday as it rallied towards 100.510, however, the index was unable to hold onto these gains and subsequently slipped back below 100.00. This morning has seen a resumption of gains with the greenback trading firmly above 100.200 against a basket of major currencies.

A very busy session for economic data today, with global PMI data expected throughout the session as well as eurozone retail sales and US employment data. The main event of course will be today’s ECB meeting with all eyes on Mario Draghi as expectations are for the central bank to announce additional monetary easing. While the main refinancing rate is expected to remain unchanged at 0.05%, economists polled by Bloomberg anticipate a 10bp cut to the deposit facility rate to -0.3% while also holding high expectations for a simultaneous increase to the €1.1tn QE package. Policymakers are struggling to reverse the fortunes of the region as it struggles with falling inflation and lacklustre growth prospects. The euro continues to trade under pressure against the dollar as it faces firm resistance towards 1.0650 and with the central bank outlooks between the US and Eurozone diverging we could see further dollar strength at the expense of the single currency.

Brent traded back below $43/bbl yesterday

CO1 Comdty Generic 1St CO Fut 2015 12 03 08 16 21

ADP employment change shows strong gains in November

ADP CHNG Index ADP National Emp 2015 12 03 08 37 28

EUR subdued ahead of ECB meeting

EUR Curncy Euro Spot Daily 03 2015 12 03 08 14 22

Events for today

0135

JP

Nov

Nikkei Japan PMI Services

0135

JP

Nov

Nikkei Japan PMI Composite

0900

EZ

Nov

Markit Eurozone Services PMI

0900

EZ

Nov

Markit Eurozone Composite PMI

1000

EZ

Oct

Retail Sales

1230

US

Nov

Challenger Job Cuts YoY

1245

EZ

Dec

ECB Main Refinancing Rate

1330

US

w/e

Initial Jobless Claims

1500

US

Nov

Markit US Services PMI

1500

US

Oct

Durable Goods Orders

Topics: US Fed, Crude oil, ECB, PMI, Brent, EUR, DXY
More from: Kash Kamal