A look at major central banks and oil
This post is branded by FxPro, Trade Like a Pro
As we enter the second half of 2017, the financial markets' attention has been gripped by global economic policies and the resulting impact of probable rising global interest rates. As Q2 came to a close, the much-anticipated rise of the federal funds rate by the US Federal Reserve to 1.25% (from 1%) appeared to spur other Central Banks to comment on the likelihood of also raising rates.
Specifically, Bank of Canada Governor Poloz's comments that the Canadian economy enjoyed "surprisingly" strong growth in the first three months of 2017 and that he expects the pace to stay "above potential" have led to the market pricing in a 90% chance that there will be an increase of 0.25% in July.
Similarly, Bank of England Governor Carney warned that the continued growth in the UK economy would eventually lead to higher interest rates. The backlash against record low UK interest rates is growing, as more top policymakers call for a hike, fueled by a sharp increase in the cost of living and a strengthening economy.
ECB President, Mario Draghi, spoke about the strengthening growth within the Eurozone. These comments raised expectations that policymakers could soon start to scale back the huge levels of ECB monetary support currently in place. The market was meant to interpret such comments as a tolerance for weaker inflation and not an imminent tightening in policy.
Also, in a widely-expected move, the Reserve Bank of Australia has kept interest rates unchanged at a record low 1.5%, but some did speculate that the RBA might also indicate when it would begin to exit ultra-easy policy. With many expecting the Australian economy to strengthen this year, the likelihood of raising interest rates becomes more probable with many traders pricing in a rate hike by the Board at around 50% over the next 12 months.
Over the past few months, the rhetoric from central bankers caused extra volatility in the markets, although oil stole much of the attention.
Since peaking in late February, crude dropped approximately 20%, with only brief rallies, completely erasing the gains it had made at the end of the year following the initial OPEC-led production cut. OPEC and other major producers had agreed to cut output by 1.8 million barrels per day for a six-month period starting January 2017, which was recently extended for an additional nine months. While this was a major shift in policy for OPEC, the hope it gave to markets was short-lived. With increased production from the US, Nigeria, Libya and other producers, the extra supply outstripped demand and forced prices lower.
With weakened demand, elevated inventories, and a recognition that the nine-month OPEC extension would be inadequate to balance the market, oil sold off and dropped to the mid-$40s and below, establishing a Bear Market. Oil traders then bought on the dip, and bid prices back up.
OPEC's oil exports are not all that different from last year's figures (per recent data), even though it has claimed success with the collective cuts. This raises the question about whether OPEC should make deeper cuts; an approach that many think is needed to balance the market. While a further production cut could be looming, Russian Energy Minister Alexander Novak said that "a global pact by OPEC, Russia and other producers to cut oil output had dampened price volatility and was reducing bloated inventories, so no immediate extra measures were needed to prop up prices". The market reads into that statement that Russia would not want any further production cuts. Russian officials argued "that another cut so quickly after the group agreed to a nine-month extension could backfire". Such a move would most likely be received as a "panic decision" and further display that OPEC's attempts to balance the market have been inadequate. Strangely, traders may look at such a move to restrict supply as bearish. It therefore appears that we may see WTI stay in a relatively narrow trading range of $40 to $50 for a period of time.
Stay up to date with the financial markets by downloading the FxPro Tools App from Google Play or the App Store. FxPro Tools is also available as a browser extension for Google Chrome, Mozilla Firefox, Safari and Opera.
