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Tax Reform Might Boost US Oil Investment, Bad for Prices Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Tue Dec 05 17 00:08 ET

Oil prices steadied after the selloff on Monday. It appears to be a tug of war between optimism over OPEC/ non-OPEC's extension of output cut deal until end-2018 and ongoing concerns over US' production. Worries for the latter could be exacerbated by the US tax reform. Currently trading at 57.5, the front-month WTI crude oil contract settled at 57.47, dropping -1.53% yesterday. The corresponding Brent contract, currently hovering around 62.5, plunged -2.01% and settled at 62.45 yesterday. Precious metals fell across the board with the benchmark Comex gold and silver contracts losing -0.35% and -0.08% respectively. US dollar was mixed against major currencies with the DXY index adding +0.33% for the day. USDJPY initially jumped to a 2-week high of 113.08 before ending the day at 112.4, up +0.33%. The greenback also climbed higher against the euro, sterling and franc. It is the second consecutive day of decline for sterling. The market was concerned about Brexit progress as the UK and the EU has still not reached an agreement on the divorce bill and the Irish border. Against the commodity currencies, US dollar rose against the New Zealand dollar but weakened against both Australian dollar and Canadian dollar. Treasuries slipped, sending yields higher, on expectations that tax reform would boost GDP growth. 2-year yields rose +4 points to 1.81% whilst 10-year yields gained about +2 points to 2.38%. This has resulted in further flattening of yield curve. Wall Street was mixed with banks and industrials strengthening while tech stocks lagging. The DJIA added +0.24% while the S&P 500 index slipped -0.11%. Nasdaq dropped -1.17% for the day.

The US tax reform has entered the stage of reconciliation between the House and Senate bills. We expect the final version would be more similar to the Senate one as President Donald Trump, as well as the Republicans, is eager to pass the bill before Christmas. The Senate version of tax reform is indeed a milder version of tax cut than Trump had promised earlier this year. It is expected the impact on GDP growth would be less pronounced than previously anticipated. As the same time, the impacts of raising US' fiscal deficit would be lower. The tax plan does have impact on US oil and gas industry. Lower corporate tax and changes in cost recovery provisions should benefit oil companies, facilitating oil investment. According to the industry- sponsored American Petroleum Institute (API), the tax plan could "allow the oil and natural gas industry to continue investing billions of dollars in the US economy and add to the 10 million US jobs our industry currently supports". This might not be positive for oil prices, though, as sky-high US oil production has been restraining prices from going higher.

On the dataflow, US factory orders contracted -0.1% m/m in October, better than consensus of -0.4% but weaker than September's +1.4% gain. In the Eurozone, Sentix investor confidence index slipped to 31.1 in December from 34 a month ago. The market had anticipated a milder drop to 32.7. On price levels, headline PPI eased to +2.5% y/y in October, from +2.9% in the prior month. The moderation came in higher than expectations of +2.6%. Released earlier today, the Caixin services PMI for China added +0.7 point to 51.9 in November. This came in better than expectations of 51.5.

For the day ahead, the RBA meeting would likely bring no change in the monetary policy with the cash rate staying unchanged at 1.5%. In the US, the ISM non-manufacturing index probably slipped -1.1 points to 58 in November, while the final Markit services PMI revised +0.6 point higher to 55.3 in November. The Eurozone would release its final GDP growth estimate for 3Q17, which probably stayed unchanged at +0.6% q/q. Retail sales for the region probably contracted -0.7% m/m in October, following a -0.7% gain a month ago.


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