Daily analysis 29.09.2016

The announcements after the OPEC meeting in Algeria have increased the likelihood of a decrease in production by the Cartel in November. Which currencies may benefit from the events regarding oil? The zloty became slightly weaker than it was yesterday. However, it’s more likely due to the announcement from Moody’s, rather than changes within Polish Ministry of Finance.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

• 14.30: Weekly jobless claims from the USA (estimations: 260k).

Surprise from Algiers

Up until 18.00 (6.00 PM) many factors were indicating that no decisions would be made at the OPEC meeting in Algeria. However, we received information that clearly increased oil quotations in the evening. Moreover, it also increased the likelihood of specific decisions during the OPEC meeting at the end of November.

Investors found out that Algeria presented an offer of reducing its production to the level of approximately 800k barrels per day. Saudi Arabia would be responsible for the majority of this obligation (approximately 450k). Iran, Libya and Nigeria were not included in this plan.

The Cartel’s opinion regarding Algeria’s offer remained unknown until few minutes past 20.00 (8.00 PM). Reuters, as well as CNBC, confirmed that the agreement has been achieved. However, it was actually different from what Algeria offered. Primarily, the reduction would be within the range of 250k – 750k barrels. Secondly, the final decision will be made on November 30th in Vienna. Thirdly, the reduction scale for particular countries remains unclear and will be established in two months. It’s most likely that these limits will not concern Iran, Libiya and Nigeria.

So what has caused Saudi Arabia and its OPEC allies to suddenly change their attitude? This is probably because of a slower than expected market balance. If the mining actually becomes decreased by approximately 500k barrels per day, the oversupply should end at the end of 2016, or the beginning of 2017. Of course, there is a risk that the OPEC members will not achieve an agreement in November, as well as that they may break the potential agreement.

On the other hand, taking into consideration that each year the demand for oil is increasing at a pace of at least one million barrels per day, the market would most likely balance in the second half of 2017 (even without a reduction of supplies.) As a result, the OPEC would most likely want to avoid the risk of reduction of oil prices during the year’s break. This would be a protection from potentially mild winter, as well as a lower than expected demand for energy resources.

A potential agreement in November would definitively increase the probability of the WTI price to move from the range of 40-50 USD per barrel, to the range of 50-60 USD per barrel. It would not only be a result of a perspective on a faster market balance, but of increasing risk for investors who estimate a decrease in prices, as well. With a relatively balanced market, any disturbances in mining (like the recent ones in Canada and Kuwait) may quickly begin to reflect in prices.

Impact on currencies

This is not surprising that the 5-6% growths of oil prices caused an appreciation of raw material currencies. The Canadian dollar, as well as the rouble, strengthened approximately 1% against the USD. The strengthening of the Norwegian krone and the Mexican peso was slightly lower (approximately 0.5%). If oil prices continue growing, the above currencies will benefit from such moves.

However, a potential increase in oil price to the 50-60 USD per barrel range seems more significant in the global context. This would probably strengthen the dollar, due to an increase in inflation expectations, which could raise profitability of the American debt. Secondly, this may also increase investments within the mining sector, which would be a positive signal for the entire economy. On the other hand, relatively low oil prices should have a positive impact on consumers behaviors. As a result, a balance in the WTI increase may be favorable for the USD.

Zloty’s slightly weaker

The Polish currency became weaker at noon, than it was yesterday. However, it’s unlikely to be a result of yesterday’s change within he Ministry of Finance. The zloty was relatively stable after this decision was announced. However, we received a few announcements from Moody’s in past few hours.

Yesterday, the Agency announced (source: the Polish Press Agency) that suspension of sales tax will have a negative impact on Poland’s loan credibility. Moreover, according to Bloomberg, Moody’s revised the perspective of economic growth for this, as well as the next year by approximately 0.5 percentage point today. Currently, this index is at the level of 3%.

In general, we still don’t expect the local matters to cause the EUR/PLN to increase to the level of 4.35. The global situation, as well as a positive sentiment towards the emerging market currencies should continue to support the PLN. A slight exceeding of the 4.30 per euro is most likely temporary. If there’s no global increase in risk aversion, the EUR/PLN should return to the range of 4.25-4.30.