Oil: More bullish price developments - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the oil related currencies have been supported in the Asian trading session by a further jump in the price of oil which has lifted Brent to an intra-day high of USD57.89 per barrel.

Key Quotes

“The new cycle high for the price of oil has been triggered by further bullish developments over the weekend. Non-OPEC members reached an agreement to cut oil production by 558k barrels per day starting from January. It follows on from the recent agreement by OPEC members to cut production by 1.2 million barrels per day. It is the first joint pact to cut production between OPEC and non-OPEC members in fifteen years. The non-OPEC agreement includes pledges from Russia to cut production by 300k barrels per day, Mexico by 100k barrels per day, Azerbaijan by 35k barrels per day, and Kazakhstan by 20k barrels per day.”

“According to reports, the joint OPEC and non-OPEC agreement covers around 60% of current oil production but excludes major producers including the US, China, Canada, Norway and Brazil. The price of oil has increased by around a fifth since the production cut agreements have been announced highlighting that the market is optimistic that it will help to rebalance demand and supply in the oil market more quickly.”

“The rebound in the price of oil has also been reinforced by comments over the weekend from Saudi Energy Minister Khalid Al-Falih who stated that Saudi Arabia will cut “cut substantially to below” their target agreed last month with other OPEC members. As part of the OPEC’s agreement to cut production to 32.5 million barrels per day, Saudi Arabia has agreed to cut production to below 10 million barrels per day. The comments are an attempt to reinforce market confidence in the agreement given lingering concerns that the deals will not be implemented fully. Upside potential for the price of oil is also being dampened by expectations that supply from shale oil producers will increase in response to higher prices.”

“Overall, the developments over the weekend support our outlook for a further gradual rebound for oil-related currencies in the year ahead. The higher price of oil is reinforcing Trump reflation trades. The yield on the 10-year US Treasury bond is now testing key resistance at 2.5% which if broken should result in a stronger US dollar especially against the yen.”