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An U-turn in market sentiments

TVC:UKOIL   CFDs on Brent Crude Oil
Oil market

The oil market continues to master successively new peaks, rising on Monday to the highest level since July 2015 . Oversupply is steadily declining while Saudi Arabia's readiness for changes looks even more reliable against the backdrop of anti-corruption detentions in the higher echelons of power in the kingdom.

Prince Mohammed Bin Salman made a purge in the ranks of government arresting royal officials, ministers and investors. The enemies of the prince were even the billionaire Alwaleed bin Talal and the head of the National Guard Prince Miteb bin Abdullah. The struggle inside the board worsened after the announcement of the plans of the kingdom to hold the IPO of the largest oil company Saudi Aramco next year, just in the phase of growing oil market, which will offer investors the stake for higher price.

Shale output in the US shows signs of further decline, as the report of Baker Hughes on Friday showed that the number of drilling rigs decreased by 8 to 729. This was the sharpest decline since May 2016.

The fall in drilling activity occurs together with the action of the OPEC + oil pact, which convinces the mutual interest of shale companies and the cartel to restore the balance of supply and demand . The pact expires in March 2018, but the rhetoric of Saudi Arabia and Russian officials has been repeatedly favored to extend the agreement by the end of next year.

US dollar

The dollar exchange rate has slightly changed on Monday, as investors "squeezed" long positions last week against the backdrop of an unimpressive NFP report. The likelihood of a "soft" version of the tax reform is also growing, where the introduction of tax incentives will be carried out in stages, rather than at a time. The rise during the Asian session was replaced by relative indifference with the beginning of the London trading.

The decline from the dollar is likely to limited because of uncertainty with the tax plan, but the bond market seems to be giving up. The yield on 10-year US bonds shows a negative trend on Monday, after a significant decline last week. The net short position on the dollar fell to a minimum of four months from $18 billion at the end of September to $3 billion in the last week.

The dynamics of EM currencies, however, suggests strengthening of the dollar. The Russian ruble continued its decline on Monday amid the carry trade rout, a period of payment of debts denominated in US dollars and a growing demand for foreign currency on the part of nation. The pair USDRUB soared to the level of 59.00, for the first time since the end of August. The signal of weakening of currencies attractive for carry trade testifies about fears of shrinking differential of interest rates or strengthening of the dollar.

British pound

Investors are actively buying back the pound from the key support level at 1.30, to which it arrived on Thursday after the meeting of the Bank of England. The pound is projected to trade in red further, falling below 1.30 due to the instability of the Conservative Party and the uncertainty surrounding the Brexit negotiations.

The expected increase in the rate by the Bank of England did nothing for the pound, as the head of the bank Mark Carney stressed that the main risk for economy remains the deal with European Union on maintaining access to the single trading market. If the country fails to reach an agreement, the pace of economy pickup may significantly slow down, as import duties can plunge a large number of enterprises into losses. The projected pace of rate normalization fell to two increases in the next three years, which caused a sharp change in expectations for the pound in the direction of the negative.

Arthur Idiatulin
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This analysis is provided as general market commentary and does not constitute investment advice.
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