Afternoon analysis 25.10.2016

Iraq seeks to be exempted from OPEC production cuts. A stronger dollar causes a slightly higher risk aversion – the British pound loses the most.

Iraq doesn’t want to cut production

Iraq (OPEC’s second biggest oil producer) wants to be excluded from any oil output cuts. At a press conference on 23rd October in Baghdad, Iraqi oil minister Jabbar Al-Luaibi said that his country shouldn’t trim it’s production because it’s currently embroiled in a military conflit with the Islamic militants. Additionally, Al-Luaibi reminded that “we should be producing 9 million barrels per day if it wasn’t for the wars”. Iraq’s production is currently at 4.7 mn, according to its ministry.

Bloomberg reports that OPEC head is to meet Iraqi officials in Baghdad today to try to resolve the matter. The confusion regarding which country should curb production and by how much causes a lot of volatility in crude oil prices. Last week’s inventory data that beat market consensus by a landslide (a decrease of inventories by over 5 mn barrels) rendered an increase of crude prices to above 52 USD. However, a significant appreciation of the dollar below 1.09 on EUR/USD triggered a selloff. During yesterday’s trading, crude oil prices went even below 50 USD, to about 49.6 USD a barrel, which was the lowest level in two weeks.

Dollar appreciates, zloty a bit stronger

The US dollar continues to increase its value which deepens the EUR/USD decline – a level of 1.0853 was noted today, the lowest since 10th March. It also brought about a near parity in the USD/CHF pair. Dollar’s appreciation had a negative effect on the British pound – GBP/USD exchange rate droped about 1% to 1.21, lowest in two weeks. The Polish currency gained today for the most of the day, although it was more the effect of a globally better sentiment. An increase in the dollar’s value and decrease of the pound caused a slightly higher risk aversion and zloty gave back some of its earlier gains. Around 16.00 the British currency lost in relation to its Polish counterpart ca. 0.8%. We paid 4.81 zł for every pound today, while it was even 4.86 yesterday. The euro cost 1 gr more than before midday, or 4.31.

Tomorrow’s events

An hour before the European session opens, Gfk will publish at 8.00 data regarding consumer climate for November. The market consensus is at 10.0, similarly to month before. Since the end of 2015 we’ve been observing an improvement in consumer confidence to the German economy – the last 4 reading were equal or above 10.0. In broader aspect, an upward trend has been present since September 2008, when the minimum was 1.5 and was caused by a globally weak sentiment due to the financial crisis of 2007-2008. The PMI data that we’ve been receiving lately suggest that there’s only a small chance that the tomorrow’s consumer climate index reading will be below 10.0.

15 minutes afther the opening bell on the New York Stock Exchange, Markit will publish the Services PMI data for the US. Market expectations are at 52.3, umchanged from previous month’s reading. Services PMI are at relatively low levels if we look at the recent years: the index was at 61.2 in May 2014 and from that time on a downward trend started. In February it was 49.7, but there’s been a graudal improvement since then.

At 16.30 EIA (Energy Information Administration) will share crude oil inventories data. The last week’s report positively surprised investors: a 2.7 mn increase in inventories was predicted but the data showed a 5.25 mn decrease. That caused the price of WTI crude oil to go up even aboce 52 USD for a barrel. The next they though, the price went down about 3% due to i.a. a stronger dollar and profit taking from investors.

The market consensus assumes a 0.8 mn increase in crude oil inventories. Historically, crude oil price are more volatile around EIA publication, so one can expect to observe a similar situation tomorrow. Especially in light of the deal that OPEC countries struck to reduce oil production.