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Oil Extends Rally as Saudi and Russia Signal to Extend Supply Cut buy 9 Months, More Countries might Join Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Tue May 16 17 00:20 ET

The rally in oil prices led the strength in global stock markets. Energy prices were lifted by news that both Saudi Arabia and Russia agree that the output cut deal should extend until the ended of 1Q18, longer than the 6-month period specified in the initial agreement. The front-month WTI crude oil prices, extending the rally for a 4th consecutive day, rose to as high as 49.66 before settling at 48.85, up +2.1%. The Brent contract, also on its fourth consecutive daily gain, added+1.93% for the day. The contract has closed above 50 since re-capturing this level again. Wall Street strengthened, with both S&P 500 and Nasdaq rising to new highs. While the energy sector led the rally for the former, tech stocks, boosted by global cyber attack, were driving the latter higher. Both indices gained +0.5% for the day. The DJIA also added +0.4%. European shares also jumped with the Stoxx 600 oil sector index soaring +0.9% and the basic resources index up +1.7%. The benchmark European Stoxx 600 index climbed +0.1% higher for the day. The euro rallied against the USD dollar after ECB's Praet reaffirmed that the Eurozone still needs "high degree" of stimulus.

Ahead of the OPEC/non-OPEC meeting next week, major oil producers have also sent positive comments that moved oil prices much higher. It's reported that Saudi Arabia and Russia signaled their preference to extend the supply cut deal for another 9 months, until the end of March 2018. The level of output cut would likely stay at 1.8M bpd. Saudi energy minister Khalid al-Falih and Russia's Alexander Novak pledged to do "whatever it takes" to reduce global oil stockpiles and balance the market. They also signaled that "a wider circle of countries" outside the current group would participate this time.

On the monetary policy front, RBA has just released the minutes for its May meeting. Aussie slipped in the aftermath although the message of the minutes was largely unchanged from the policy statement. In short, the two issues concerning the central bank are the housing market price and the labor market. For the formed, the minutes noted that "growth in housing credit had continued to outpace growth in household incomes, which suggested that the risks associated with household balance sheets had been rising". In response to the market concerns over the increasing proportion of part-time workers in the labor force, policymakers judged that "labour market deregulation, technological change and the shift towards a more service-based economy" are the key reasons for this phenomen. They believed that "the distinction between full-time and part-time work had become less important in assessing labour market conditions". Elsewhere, ECB's Chief Economist Peter Praet acknowledged the economic improvement in the bloc. However, he pointed out the divergence between the "very strong" survey data and the "not very strong" hard data, stressing that "growth still needs a high degree of accommodation". He expects the output gap to be closed sometime in 2019.

The US dataflow was a mixed bag. The headline NAHB housing index added +2 points to 70 in May, just shy of the March high. The sales expectations index jumped +4 points to 79, highest in the recent cycle. By contrast, the Empire State manufacturing survey disappointed with a -6.2 point slump in the headline index, pushing it to the negative territory unexpectedly. Meanwhile, the new orders index plunged -11.4 points to -4.4. The shipments and employment indices also edged lower although managed to say in the positive territory. The downside surprise of the Empire State index, the Philly Fed manufacturing index, due Thursday, should have gained more attention.


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