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Commodities Retreated as Geopolitical Tensions Eased for Now. Stay Cautious on Saudi-Iran Conflict Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Tue Nov 07 17 23:14 ET

Commodity prices generally weakened in the start of the week. In the oil market, both crude oil benchmarks pulled back after the relentless rally over the past weeks. The front-month WTI crude oil contract slipped -0.26% while the Brent contract was down -0.9% for the day. Aiding the retreat were OPEC and EIA reports suggesting that US shale production would increase faster than previously anticipated. Precious metals were pressured with the benchmark Comex gold and silver contracts down -0.45% and -1.69% respectively. Geopolitical tensions appeared to have eased temporarily as US President Donald Trump softened his stance on North Korea in his trip in Asia. However, traders should remain cautious over the situation in the Middle East, in particular the looming conflict between Saudi Arabia and Iran. Further intensification of which could readily trigger another round of oil rally. US dollar has a mixed day against major currencies, although the DXY index settled higher by +0.16%. AUD was the worst performer as it lost -0.31% against USD. The pre-RBA rally was shortly erased as the market was disappointed by the central bank's unchanged guidance. Yield differentials should continue to weigh on the pair in the medium term.

US Oil Production

In its annual World Oil Outlook report, the OEPC raised US' shale output forecast to 7.5M bpd in 2021, up +56% from the forecast last year. It also estimated that the call for OPEC's crude would stay largely the same until shale oil output peaks after 2025. The growth, triggered by higher oil prices as a result of OPEC/ non-OPEC output cut deal, poses a dilemma for OPEC. As the cartel suggested, US' shale oil "most strikingly" exceeds previous expectations after showing the "resilience and ability to bounce back... This growth is heavily front-loaded, as drillers seek out and aggressively produce barrels from sweet spots in the Permian and other basins". Separately, the US Energy Information Administration (EIA) estimated that its crude oil production would increase by +0.72M bpd to 9.95M bpd in 2018. This marks an upward revision by +0.04Mbpd from the previous month.

Oil Inventory The industry-sponsored API estimated that crude oil inventory fell -1.56 mmb in the week ended November 3. Fr refined oil products, gasoline stockpile increased +0.52 mmb while distillate declined -3.13 mmb. The EIA report would probably shows a -2.88 mmb decline in crude oil inventory. Gasoline and distillate stockpiles might have dropped -1.94 mmb and -1.37 mmb respectively.

Trump's Asian Trip and North Korea

North Korean problem is inevitably a key topic in Trump's trip to Asia. Surprisingly, the US President softened his tone on the issue as he urged the pariah state to return to the negotiation table. Speaking at the joint press conference South Korean President Moon Jae-in in Seoul, Trump for the first time in his presidency called North Korea to "to come to the table and make a deal that is good for the people of North Korea and the people of the world". This marks a dramatic change from his previous rhetoric of calling Kim Jong-un a "little rocket man", warning of "fire and fury" and that the US would "totally destroy" North Korea. Easing tensions between the US and North Korea should have diminished demand for safe haven assets, such as gold and Japanese yen.

Saudi-Iran Conflict

As the Saudi crown prince Mohammed bin Salman speedily consolidates his power, conflicts between the Kingdom and its long-term rival Iran have shown signs of re-intensifying. Bin Salamn has accused the Iranian government of supplying missiles to the Houthis rebel group in Yemen, calling the missile fired over the weekend at Riyadh from Yemen a "direct military aggression by the Iranian regime". Iran has dismissed the accusation, reported by the Saudi Press Agency on Tuesday, as "contrary to reality". Meanwhile, the US has also accused Iran of supply weapons to the Houthis and called for UNSC's intervention.

Macroeconomic Events

The euro failed to bounce much although there was hawkish news suggesting some ECB officials opposed the open-ended QE language. It was reported that Board member Benoit Coeure, Bundesbank President Jens Weidmann and Bank of France Governor Francois Villeroy de Galhau suggested at the October meeting to link the overall level of monetary stimulus to inflation, rather than just the QE program. However, the central bank eventually decided to maintain the language of continuing asset purchases "until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim". Meanwhile, ECB board member Sabine Lautenschlaeger pledged that she supports a "clear exit" from QE.

On the dataflow, US' JOLTS survey reported that job openings rose to 6.09M in September. Meanwhile, the quit rates climbed slightly higher to 2.25 and the hiring rate slipped -0.1 percentage point to 3.6%. in the Eurozone, retail PMI dropped -1.2 points to 51.1 in October. Retail sales grew +0.7% m/m in September, higher than consensus of a +0.6% growth and the upwardly revised -0.1% contraction in the prior month. Germany's industrial production contracted -1.6%, doubling expectations of a -0.8% fall. The August reading was a +2.6% expansion. Today, Canada would release its housing market data. Housing starts probably increased to 220K in October, from 217K a month ago. Building permits probably slipped -0.2% m/m in September, following a -5.5% decline in the prior month. BOC governor Stephen Poloz reiterated in a Montreal conference that the central bank would remain cautious in future monetary policy decisions.

 

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