Dollar Is Firm But Loses Momentum Against The Yen


The capital markets are mostly quiet, amid a light news stream, and ahead of three key events in the coming days, with US markets closed tomorrow and light participation expected on Friday. These events are tomorrow’s OPEC meeting, the flash euro area inflation reading on Friday, and month-end portfolio and hedge adjustments.  

The odds of a substantial output cut from OPEC appears to have slipped. The Saudi oil minister continues to play down the need for output cuts, apparently on grounds that to stabilize the market; more than OPEC cuts are necessary. Although there were some, suggestions that Russia could cut output to help facilitate on OPEC cut were not seen as particularly credible. Rosneft official was quoted on the newswires indicating Russia does not plan on reducing its output.  

Simply put, as a cartel, OPEC ostensibly is interested in keeping prices higher than they would otherwise be. However, for numerous reasons, OPEC is not the price setter it once was. Especially with the rise of US output, there has been a significant shift in the underlying fundamentals, and this requires a new strategy. Essentially, prices may have to fall to levels that begin curtailing production in a significant way. This is seen as closer to $70 for Brent and $60-$65 for WTI.  

Part of the challenge is that in industries that have high fixed costs, which in this case may be more a function of fiscal need than the cost of production, there are incentives to produce even at a loss. Or worse, increase production in the face of falling prices to try to preserve revenue levels. Of course, this serves to exacerbate the problem.   

The failure of OPEC to indicate a serious cut in output will likely encourage fresh selling of oil. This would likely support sovereign bond markets and could support equity markets, outside of energy. It may mean little relief for high yield bond market indices for which energy sector bonds account for a significant part.  

Reviews

  • Total Score 0%
User rating: 0.00% ( 0
votes )



Leave a Reply

Your email address will not be published. Required fields are marked *