Oil volatility makes up for lack of OPEC surprise

Posted by Matt Simpson | 25/05/2017 22:36

Volatility erupted across the energy sector as OPEC seemingly over promised yet underdelivered, sending WTI down by over 5% and dragging oil markets down with it.

OPEC confirmed they would extend their oil production cuts by a further 9 months, which was at the lower bound of the 9-12 months expected prior to the meeting. Oil was practically begging to be knocked off its perch after rallying into the OPEC meeting with wide expectations extended cuts. As the extensions were estimated to be around 9-12 months, OPEC needed to far exceed this time horizon for Oil to sustain its’ rally. They had also built a rod for their own backs by saying they would do ‘whatever it takes’ – the markets clearly wanted more.

WTI shed 5.16% by the close to mark its most bearish session since July ’16. Now firmly below $50 and near the low of the session, we expect erratic price action before the market finds equilibrium. Yet the prominent swing high at $52 makes any retracement towards $50 a tempting level for bears to fade and drive oil lower in the near-term. Support levels await at 48.36, 47.62 and 47.

The S&P500 and Nasdaq shook off any concerns of falling oil prices and higher VIX by extended their record highs. XLE (SPDR ETF for US energy stocks) appears set to break the May low and trade at its lowest since August 2016. The sector has largely ignored the broader market this year after peaking days prior to the Fed’s December meeting. It has also taken little notice of the rebound in oil prices leading up to the OPEC meeting and remains firmly within a bearish trend from the December highs. So, whilst oil prices appeared more optimistic over OPEC’s ability, stock traders are less impressed by earnings potential. We expect the bearish oil theme for stocks to be dragged over to the Asia session today, although as S&P500 and Nasdaq extending record highs to defy the energy sector, we could still be in for bullish tone at the open.

Weaker oil helped the US Dollar Index finish higher for the day yet in no way does it look threatening to the bears. With traders still mulling over soft US data, distrust of a 3rd hike and the FOMC minutes, there seems little reason to bid the Dollar right now – especially whilst Trump is on the back ropes. The US Dollar fared better against Oil currencies, gaining 0.73% against the Russian Ruble and 0.57% against the Canadian Dollar. Yet these moves still appear to be corrective and may be short-lived as the Dollar remains in the doldrums.

USDJPY remained within the prior days range although we continue to see recent gains as more likely corrective. With expectations for Q1 GDP to be revised higher to 1%, there’s potential for further disappointment here too – even if Q1 is deemed to be transitory by the Fed.

AUDUSD was dragged lower among Oil’s commotions and broke the 1th May bullish trendline. As domestic data now takes a back seat until next week, US Dollar price action will be the key driver. Yet as we see Dollar upside as limited, AUD could remain supported above 0.743 support yet capped below the 75c threshold.

Matt Simpson | Senior Market Analyst

A certified technical analyst, combining macro themes, monetary policy and business cycles to generate Forex and commodity trade ideas.

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