Oil slips despite deeper OPEC+ production cut; Gold stumbled

On Friday, Wall Street Futures and gold soared, while USD slumped during Fed Chair Powell’s comments on hopes of an early Fed rate cut from March’24 instead of earlier Market pricing of May’24. This is despite Powell’s comments being less dovish than expected as Powell termed the current market pricing of an early rate cut from May’24 as speculative and premature.

Overall, Powell indicated current rate hike cycle is almost over unless there is a nasty surprise in the core inflation trajectory, but at the same time Powell also clearly said Fed is still uncertain that the current Fed rate is in a sufficiently restrictive zone to push core inflation back to +2.00% target over the medium term (by Dec’25); i.e. Powell deliberately kept the option of at least another hike in the coming months in line with most of other Fed policymakers to maintain the hawkish hold stance.

Additionally, Powell also specifically said the present market speculation of an early rate cut is premature; i.e. Powell does not agree with the present market pricing of a Fed rate cut from as-early-as March-May’24. Powell said current talks/speculation of the market of an early rate cut in 2024 is purely speculative and premature: “The FOMC is strongly committed to bringing inflation down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective. It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so.”

On Friday, all focus of the market was on Fed Chair Powell in an event to see whether he/Fed is comfortable with the current market pricing for an early rate cut in May’24 after a series of dovish Fed jawboning, led by Waller. Although most of the Fed policymakers are not acknowledging the current rate hike cycle is over, the market is now quite confident about that. Most of the Fed policymakers now prefer a hawkish hold stance; i.e. maintaining the possibility of another +25 bps rate hike if it appears that core inflation is not cooling as fast as expected. Also, most of the Fed policymakers are now not thinking about any rate cuts in early 2024 to ensure tighter financial conditions and lower inflation expectations.

But as the Fed is already talking about (discussing) rate cuts and core inflation is cooling quite fast, the market is now expecting -100 bps Fed rate cuts cumulatively in H2CY24; i.e. @ -25 bps each in July-September-November and December (if U.S. core CPI indeed averaged at around +3.0% in H1CY24). The present Fed repo rate is at +5.50%, while the average core CPI was around +5.40% in H1CY23 and expected +4.0% in H2CY23. Thus the real repo rate would be around +1.50% (5.50-4.00) by Dec’23.

Fed may hold the repo rate at +5.50% at least for H1CY24 and watch the actual core inflation trajectory for the 1st half of 2024 and the outlook thereof. If core CPI indeed falls below +3.0% and Fed is confident that average core CPI would be around +3.0% in H2CY24, then Fed may gradually cut rates by -1.00% for a repo rate at +4.50%, which will translate a real repo rate around +1.50% (4.50-3.00)- in line with present restrictive policy stance to bring core CPI back to below +2.00% by Dec’25.

In any way, on Friday Gold soared to a fresh lifetime of around $2075, while DJ-30 surged +0.80%, NQ-100 gained around +0.5% and SPX-500 jumped almost +0.5% on hopes & hypes of an early Fed rate cut by Mar’24.

On Friday, Wall Street Futures also undercut while Gold was buoyed after Israel's PMO confirmed the end of the extended Gaza war pause and the resumption of fighting with Hamas, which would be long and designed to eliminate Hamas and getting back hostages in the process. But the overall impact was small/brief as Israel and the U.S. are reportedly also planning to kill the top five Hamas leaders and force them to surrender or get out of Gaza-paving the way for a permanent ceasefire and sustainable/long-term peace (one/two states) solution.

Over the weekend, Gaza war tension intensified along with Chinese and North Korean; some headlines:

·         Israeli spy chief vows to hunt down Hamas everywhere

·         Israel/Mossad will hunt down Hamas in Lebanon, Turkey, and Qatar even if it takes years

·         The cabinet has set us a goal, in street talk, to eliminate Hamas. This is our Munich. We will do this everywhere – in Gaza, in the West Bank, in Lebanon, in Turkey, in Qatar. It will take a few years but we will be there to do it

·         Turkey warns of “serious consequences” if Israel tries to hunt down Hamas members living outside of Palestine

·         Israeli General: Ground forces have almost completed their mission in the Northern Gaza strip

·         The Israeli military says operations in southern Gaza will be “no less strength” than its earlier offensive in the north as it extends its ground attack to the entire Gaza Strip

·         Israeli Defense Minister: Expect the war to continue at its current intensity for at least 2 months

·         A Lebanon-based Hamas official, accused Israel of pursuing a deliberate strategy of luring Gaza civilians south “to trap and massacre” them there

·         Iran: Two Revolutionary guards killed in Israeli attack in Syria - State Media

·         Iran has warned of an expansion of war in the region if Israeli forces continue to commit “war crimes” against Palestinians in Gaza and the occupied West Bank

·         The U.S. has sent 100 bunker-buster bombs to Israel

·         U.S. Navy Downs Drones After Houthis Strike Three Ships in the Red Sea

·         US military carries out a strike against Iran-backed drone staging site in Iraq

·         The Yemeni Houthis attacked three ships off the coast of the country Sunday, firing ballistic missiles

·         US Navy Ship thwarts multiple missile attacks in the Red Sea reputedly by Yemen's Houthi group

·         The US military has confirmed that there were four attacks against three separate commercial vessels

·         The US carried out self-defense strike in Iraq against 'imminent threat' at a drone staging site - US Military Official

·         China's Military: The US deliberately disrupted the South China Sea and seriously violated China's sovereignty

·         China's Military: The US seriously undermined regional peace and stability

·         China infectious disease spike: Health authorities recommend reducing large gatherings

·         On Friday five US Republican senators asked President Biden's administration to ban China travel amidst rising respiratory illness cases

·         North Korea will take countermeasures against individuals and organizations that impose and enforce sanctions – KCNA

·         North Korea: We will retaliate against the US, Japan, and Australia for sanctions against its satellite launch – KCNA

On early Asian Monday, Gold surprisingly soared to almost 2148 from around Friday closing 2065, made a new lifetime high and then stumbled to almost 2075 by the European session opening and eventually slid to around 2020 as the US10Y bond yield recovered. Although there was no clear trigger for the sudden surge in Gold in the early Asian session, when the market usually operates in very thin volume, it may be either a fat finger or China PBOC buying.

Also, there were some geopolitical headlines like Iran may get involved in the Gaza war as Israeli ‘genocide’ resumes after the temporary ceasefire; the U.S. has attacked Iran-backed Houthi drone sites in Iraq after three U.S. Navy ships were attacked along with some commercial vessels; China accused the US of violating its South China border and North Korea also warned U.S., Japan and Australia for economic sanctions after the launch of its spy satellite and ‘White House photo-op’. But none of these geopolitical headlines are serious enough to trigger WW-III. In any way, Gold stumbled as the market may be now convinced that the Fed will not cut rates in haste in H1CY24. Thus, Wall Street Futures also slipped Monday on fading hopes of an early Fed rate cut by Mar’24.

Oil stumbled despite deeper OPEC+ production cut:

On Thursday (30th November), after days of negotiations drama and extended talks/jawboning, OPEC+ finally (officially) announced voluntary cuts of around -2.2 mbpd for Q1CY24, including Saudi Arabia’s current voluntary cuts of -1.000 mbpd, as well as Russia’s -0.300 mbpd voluntary cuts. That leaves additional voluntary cuts of around -0.900 mbpd. Additional voluntary cuts of around -0.696 mbpd were pledged from Iraq (-0.223 mbpd), UEA (-0.163 mbpd), Kuwait (-0.135 mbpd), Kazakhstan (-0.082 mbpd), Algeria (-0.051 mbpd) and Oman (-0.042 mbpd).

OPEC released an official statement: Several OPEC+ countries announce additional voluntary cuts to the total of 2.2 million barrels per day

“The OPEC Secretariat noted the announcement of several OPEC+ countries of additional voluntary cuts to the total of 2.2 million barrels per day, aimed at supporting the stability and balance of oil markets.

These voluntary cuts are calculated from the 2024 required production level as per the 35th OPEC Ministerial Meeting held on June 4, 2023, and are in addition to the voluntary cuts previously announced in April 2023 and later extended until the end of 2024.

These additional voluntary cuts are announced by the following OPEC+ countries: Saudi Arabia (1,000 thousand b/d); Iraq (223 thousand b/d); United Arab Emirates (163 thousand b/d); Kuwait (135 thousand b/d); Kazakhstan (82 thousand b/d); Algeria (51 thousand b/d); and Oman (42 thousand b/d) starting 1st of January until the end of March 2024. Afterwards, to support market stability, these voluntary cuts will be returned gradually subject to market conditions.

The above will be in addition to the announced voluntary cut by the Russian Federation of 500 thousand barrels per day for the same period (starting 1st of January until the end of March 2024), which will be made from the average export levels of May and June of 2023, and will consist of 300 thousand barrels a day of crude oil and 200 thousand barrels per day of refined products.”

Overall, at a glance, the latest OPEC+ voluntary cut is -2.000 mbpd, not -2.200 mbpd as Russia’s export cut includes cuts of refined products -0.200 mbpd and crude oil -0.300. Thus the additional voluntary cut is only around -0.7 mbpd (~0.696 mbpd) against market expectations of at least -1.000 mbpd (as per OPEC+ jawboning before the meeting/decision). Even this cut of -0.7 mbpd is voluntary and being pledged from ‘unwilling’ producers. Subsequently, oil stumbled.

The Saudi energy minister (ABS) has criticized the market’s response to the OPEC+ announcement, accusing conspiracy from commentators/speculators, who failed to understand the deal. ABS suggested that this would change once people see the reality of the deal:

·         I honestly believe that the 2.2 million will overcome the usual inventory build that usually happens in the first quarter

·         We wanted the market to know there would be a phased-in

·         We will be careful about what language we use

·         I trust Russia and UAE comply with pledges

·         Cuts will address the inventory build in the 1Q

·         Sees signs oil demand is improving

·         OPEC+ cuts can go beyond Q1

·         Curbs on OPEC+ production will be phased out only after consideration of market conditions.

Meanwhile, on Monday, Deputy US Energy Secretary Turk said:

·         The US is going to take advantage of low oil prices to refill the reserve

·         The US oil reserve refill is limited by physical constraints

·         The US DoE is to buy back as much oil as we possibly can

·         The US seeks to buy up to 3 million more barrels of oil for SPR for February delivery

·         Oil companies will return 4 million barrels of oil to the US Strategic Petroleum Reserve by February from the previous exchange

·         The US is going to take advantage of low oil prices to refill the reserve

·         The US oil reserve refill is limited by physical constraints.

·         The US DoE is to buy back as much oil as we possibly can

Conclusion:

On Monday, oil was under pressure of the concern of higher supplies as the OPEC+ voluntary cut is only around -0.7 mbpd instead prior estimate of -1.0 mbpd. But oil was also buoyed by U.S. indication of SPR refilling.

Overall at a glance in Oct’23, the OPEC+ (including exempted members Mexico, Iran, Libya, and Venezuela) production was almost unchanged sequentially at around 43.19 mbpd, but much higher than the July’23 levels of 42.62 mbpd. If we consider the U.S. and Brazil production increase of around +1.60 mbpd on average, total global production may be higher by around +1.50 mbpd even after the -0.10 mbpd average production cut by OPEC+. In any way, most of the OPEC+ producers are now producing oil at around their current maximum sustainable capacity except Saudi Arabia, Russia, Iraq, Iran, Nigeria, Kuwait, and UAE to some extent; net effective OPEC+ spare capacity is now around 5 mbpd, led by 2.32 mbpd of Saudi Arabia, which is the kingmaker of the oil market.

The U.S. is now in duet with Saudi Arabia to keep oil prices in control and is even ready to allow Iran to export higher while going slow to refill the SPR shortage. As oil is Saudi Arabia’s main source of revenue, there is a constraint for it to cut further, although it may extend the present voluntary cut of -1.0 mbpd through 2024. But the U.S. may also counter this by higher production and supply from Iran, Iraq, Venezuela, UAE, and even Kuwait by influencing various policies. Robust demand from China and India is now basically for higher refining demand from Europe, which bans Russian ‘dirty’ oil, which is being rerouted through Chinese and Indian refiners (‘washing machine’).

Looking ahead, we may see subdued growth in global oil demand amid the synchronized chorus of EVs, increasing adoption of high/semi-high-speed railway networks in the U.S., Europe, India, and China (instead of personal long drive and even air travel), and WFH/Hybrid mode of work.

Technical trading levels: DJ-30, NQ-100 Future, oil and Gold

Whatever may be the narrative, technically Dow Future (36225), now has to sustain over 36100 levels for a further rally of 37050-37350 in the coming days; on the other side, sustaining below 336050/36000 may further fall to 35350-35250, and may again fall to 35000-34800/34650-34120/34000 and 33700/33200-33000/32400 in the coming days.

Similarly, NQ-100 Future (15850) now has to sustain over 16200 for a further rally to 16700-16800 zones; otherwise sustaining below 16150/100-16050, may again fall to around 15100-14140 in the coming days.

Technically Oil (73.30) now has to sustain over 76.30/77.75-79.50 for a further rally to 82.50/84.50-90.50/95.50; otherwise sustaining below 77.00-76.50/75.00, may again fall to 73.80/71.80-71.40/70.00 and even 66.40-65.40 in the coming days (if OPEC+ is unable to agree for a deeper cut and Saudi Arabia withdraws the voluntary cut).

Also, technically Gold (XAU/USD: 2030) now has to sustain over 2015 for any further rally to 2350/2075-2125/2150 areas.; otherwise sustaining below 2080/2075-2060/2045, may again fall to 2020-2010/2005-2000/1995, and further to 1985/1975-1960/1950 and 1928/1908-1895/1885 and 1850/1810 in the coming days (if there was a permanent Gaza war ceasefire and Fed sounds more hawkish than being expected ON 13th December).