The OPEC Political Hot Potato

Pull up a chair as the chunky OPEC production cut is bound to turn into a political hot potato.

MARKETS 

US equities were a touch weaker Wednesday, S&P down 0.2% after recovering from heavier losses earlier in the session. Oil was up 2% after OPEC+ announced it would reduce production targets by 2mn barrels daily. US10yr yields closed 11bps higher to 3.74% as the oil price inflation premium weighs on fixed income concerns.

OPEC

OPEC has over-delivered versus the 27 Sep headline that Russia would propose 1 mmb/d cut that fulfills the policy guidelines.

Right now, the oil complex is busy gauging the complexities of the actual cut while factoring in the misalignments between the production and quota. Suppose the entire amount is shared pro-rata; estimates of the true cut range between 800-1.2 mb/d. So, using a midpoint of -1 mmb/d could be sufficient not only to set a price demarcation line at Brent $85 p/b, but it is conceivable that the international benchmark could push back above the psychological $100 mark in the next few quarters.

But this is a significant number in light of an unprecedented tightness given the record level of Brent backwardation.

OPEC+’s stated rationale behind the cuts was two-fold. First, they acknowledged heightened macro concerns that require an initiative-taking approach to stabilize the market. Second, they maintain that the world is too short of spare capacity and that oil prices must be higher (especially relative to other energy prices) to incentivize appropriate investment.

Energy stocks benefited from OPEC production cuts announced in Vienna, boosting the oil rally further. Gains were likely muted as the cuts were well flagged into the announcement.

FED

Taking the shine off the positive sentiment around a slower pace Fed, San Francisco Fed President Mary Daly said market anticipation of rate cuts next year is misplaced, as the central bank aims to keep policy tight to secure 2% inflation.

STOCKS

After looking at a cross-section of S&P 500 flow metrics this morning, it is worth reminding folks that short covering is never a harbinger of a continuous risk rally. Still, we should never underestimate the power of market participants as the tale of the tape was quite resilient overnight despite the USD strength and the move higher in the rates markets.

It is far too early to say stocks are decoupling from Marco or us that have hit peak rates, although arguably, the Fed is nearing the end of that runway; hence the prospect of peak rates more emboldens investors.

That said, it is probably worth keeping an eye on oil prices as any move toward Brent $100 will be perceived poorly for European assets. The two-asset class moves that consistently weigh on EU risk assets are higher oil prices and a strong US dollar.

We know market participants are buckling in for volatile NFP because of its importance to the Fed’s decision-making process and because the forecast range is also pretty wide. There are 68 estimates on Bloomberg with a median of 260k. But the highest estimate is 389k while the lowest is 199

OIL

Putting an even bigger smile on Oil Bulls’ faces, EIA crude inventories fell. The weekly EIA report shows commercial crude oil inventory was down 1.4mn bbl last week, excluding the SPR (SPR inventory fell 6.2mn bbl). Meanwhile, inventories were down across end-products. Gasoline inventory was down 6.2mn, falling to the lowest level since 2014. Meanwhile, distillate inventory was down 3.4mn. WTI and RBOB futures are popping higher after the release.

Pull up a chair folks as the chunky OPEC production cut is bound to turn into a political hot potato, significantly so as US inventories drain.

FOREX 

The FX market is running with signs the US rates are topping, so as long as cross-assets risks perform well, the dollar safe-haven premium will erode, causing traders to pare back long dollar bets, but the opposite will continue to hold. Hence risk sentiment could drive the dollar direction between now and payroll. But this is an unstable Betty Grable market and likely too early to write the greenback off.