Are OPEC doomed to fail?

Good morning, Thursday, 6th of December. Hope everyone is well. What we're going to cover in the briefing today, we're going to predominantly focus on oil and the OPEC meeting happening in Vienna both today and tomorrow. So already seen quite a lot of price movement and headlines that have come out. We're also going to have a look at this diminishing optimism over the, the trade truce between the US and China, which obviously helped lift markets on Monday reversed on Tuesday, lower on a Wednesday, took her for a drink on Thursday. We were doing XYZ on Friday. But without quoting the pun, the optimism out of the positivity from developments that came out of the G20 and the dinner between Chump and Xi, incredibly short-lived. And we've had a little twist in the tail overnight. And let's get straight to that because that's what's explaining some of the weakness in the initial equity open this morning. You can see here in the center left chart, this is the DAX future, quite an aggressive gap lower, and this came after some quick-fire selling at the recommencement of trade in the S&P last night. So don't forget there was that in respect of the, uh, the passing of the 41st president, Bush Senior, uh, there was an early close of Globex trades. So we closed at about 2:30 London time. We reopened then as per normal, uh, last night London time, 11:00 PM. We immediately shot lower. Uh, now why did that occur? Well, this was the headlines that people are looking at, a complete kind of breakdown then of trust, or at least a truce between the two countries, because Huawei Technologies' chief financial officer was arrested in Canada over potential violations of US sanctions on Iran on the orders of the US, basically provoking outrage in China. So if there was a kind of peace and harmony between the two, that now has evaporated incredibly quickly. And so this kind of trade war risk back into the forefront has created then some meaningful downside here in the equity market. I mean, if we're looking at the S&P here on the chart, now this is the gap up that we had here on the, the initial agreement that came from the G20 at the weekend, and then we've given that back so quickly. If we start looking at the, the S&P on a slightly longer time frame, so here I've got a couple things marked up. The kind of, um, the channel, if you like, from the previous year-to-date highs at the beginning of the year, and perfectly with that February sell-off to the October low on the correction that we had. But then a little bit more focused in the near term, we've obviously seen, as Saif was talking about yesterday, the shorter time frame daily moving averages moving below the long term, indicative then of potentially from a technical indicator point of view, more downside could be coming. And then, you know, we found such great resistance around that descending kind of trend line with the Fib retracement of that October move. And ever since then, we've just come lower and lower. And now, even though we've had a dovish turn from the Fed, the reignition, if you like, of trade tension is putting renewed downside on this equity market. So I guess if we're looking at downside levels, Uh, you've got that October 29th lows, the retest on the 23rd down at those levels. So really, uh, this kind of area here is going to be quite key, uh, that I'll be looking at. And then as I said, the longer term trend line as well coming in just below with that October low. So if we did continue to decline, be looking for some pretty good support around here, but a breach of these levels obviously then starts to open up things potentially to the downside. Um, with that being said though, talking of the S&P, just while I'm on it, I quickly will show you this. I did catch this this morning in the FT, and basically this is, uh, when we come to the end of the year, this is when all the big sell-side institutions start putting forward their 2019 kind of outlook. And I just saw this because this is the S&P 500 2019 targets. And you would think, you know, if you were looking at the sell-off that we've had in equities, this inversion of the yield curve that is grabbing a lot of attention at the moment, which is indicative of potentially an impending recession, people are becoming more downbeat. And obviously there's a lot of risks out there, potential Brexit no deal, Italy, the trade war, you name it. But Credit Suisse are looking for a 3,350 S&P target year-end 2019. A 12% increase. Citigroup 11%, Goldman's 5%. It's only actually Bank of America, Merrill Lynch, and some of these bigger names that's looking for a -3.3% year-on-year move. So yeah, just quite interesting as they've pulled back, but there's still quite a degree of optimism here. I mean, Credit Suisse looking at the more punchy end of optimism— tax cut boost fades and risk of yield curve inversion exists. So they're paying, they're paying note of the risk factors, but earnings and economic growth should propel stocks. Um, Citigroup earnings, credit conditions still support limited market upside appreciation potential. So although we're in the late stage of the economic cycle, these guys have a belief that, you know, that tipping point's not coming quite as yet. Um, the inversion would suggest then that, you know, the time frame we could be looking at could be beyond that of a year. So 2019 could still yield some return. Others of an opposing view, of course. But yeah, I just thought I'd point that out. It was just quite interesting this morning. So net-net, bit of a breakdown between China and the US, and that's filtered through. Hasn't really been much of a, a read across into other assets though. I wouldn't say that the market is trading in complete kind of risk-off mode. If anything, gold's unresponsive. The Japanese yen has moved actually in the opposite direction in the overnight session. What might explain that is there were some comments overnight from this chap. He is the head, the governor of the Bank of Japan, Kuroda, who dismissed the chance of any near-term interest rate hike, saying that restocking the central bank's policy ammunition now could delay the achievement of its inflation target. Now, I would say that, you know, we're a long way away from anything like this happening, you know, policy tweaks of that significance on an interest rate in Japan. But the comments nonetheless continue to kind of fuel that, that more dovish stance, if anything. Um, the main thing though that I wanted to talk about was in this briefing is oil prices. And for the main reason that today and tomorrow is going to be particularly volatile for the price of oil. There's a few things that I wanted to go over, um, and that is that, you know, already this morning— I mean, just looking at this morning's price action, which, you know, if I just circle, is this— we've seen a $1 range within the moment that UK European players came into the market and And what we've done is we've gone up a dollar, we've come down a dollar, and we're exactly to the tick of where we were. Now, this is absolutely classic price activity that you get around the semi-annual meetings in Vienna for the OPEC officials. Um, a few things here though that I want you to be aware of, um, that is a look at the tentative schedule. So for today, um, there's an opening session, closed session with the delegates and the Secretary-General, and then there's a press conference due for later in the day. However, if you are familiar with this process, you— this tentative program, you might as well scrunch it up and throw it in the bin, because if any event that you're going to follow in financial markets, OPEC's scheduling is probably the least likely to be followed. By that, what I mean is these guys, the oil ministers, are absolutely— will start talking to the press, giving their latest intake or insight. What is it that they're going to do? Giving you a quick flavor of what's happened this morning, and that can explain the initial rally well, the initial rally came. OPEC delegate says OPEC Plus— so this is important, the plus means that it's OPEC plus non-OPEC, so i.e., Russia— could only cut 1 million barrels per day if Russia is willing to contribute a cut of 150. OPEC Plus could cut in excess of 1.3 million barrels per day if Russia cuts circa 250. The cut is unlikely to be over 1.4 million barrels per day. Now, I think this is quite important because it helps give you a bit of a framework for a range of the size of the cuts that are under discussion. Here, basically what's happening is that OPEC, i.e., Saudi, are from this comment saying that, look, if Russia are willing to do just that little bit more, you know, an extra 50k on their cut, we're willing to match that in kind and we'll deepen our cut. In that respect. So the range you've got here is a low end at 1 and a high end cut, i.e., more bullish, would be 1.4 million on a cut. Then you had the next things that came out, which was the Nigerian oil minister, and he said OPEC+ cuts are unlikely to exceed a range of 800 to a million. So remember your framework of expectations. He's now said potentially it could be 800,000. So this is a bearish situation. Yes, they're cutting, but they're not cutting anywhere near what the market was initially expecting. Remember a week ago, or at the beginning of the week, the talk of the town was a cut of 1.4 million. Now Nigeria is putting out the figure of 800,000, you know, which would be incredibly disappointing for the recovery— don't forget— that we've seen in oil prices. Now this is the consolidation, if you like, that we've seen. We've obviously had this meaningful correction, even more than that, this bear market territory move that we've seen in oil develop over the last 8 weeks or so. But we've consolidated as the market awaits now the, the outcome of these meetings. But oil is only $2 off $50, and so it is still a precarious situation for the price if they do not deliver now on what helps see the market gap up at the beginning of the week. And this is what I was talking about on Monday in the very first briefing, is that has OPEC now, you know, are they doomed to fail by talking up action? Now you've got to deliver. If you don't, well then we're going to start retesting, breaking this this rectangle I put here, this support point of the, the range of the week, and also some of the upper end of the range of last week, you know, that 50 comes right back into contention again if they don't go as far as I'd say a million. Now the problem here, as we've been discussing throughout the week, is what they've got to deal with is Mr. Trump, and of course Mr. Trump urging OPEC nations via, of course, Twitter not to cut oil production ahead of the meeting of the cartel to consider a reduction in output. Trump said, hopefully OPEC will be keeping oil flows as is, not restricted. The world does not want to see or need higher oil prices. The problem then that Saudi has is, of course, they would want to cut in order to prop the price back up so that they can then start to get somewhere close to a more viable valuation for a price of oil to facilitate their fiscal ambitions. But this is the problem. In the US, this is happening, and the Senate resolution Um, would fault Saudi prince for the Khashoggi death. So what this is, is 6 US senators have introduced a non-binding resolution yesterday that asserts that MBS, the Crown Prince of Saudi, was complicit in the murder of the journalist, as senators tried to reach an agreement on a stronger bipartisan response. Big problem. I'm not going to go into this again in too much detail, but You know, the Saudis, if they cut, and if they cut by something like 1.4, which really they have to do— a cut in my mind of a million would be a disappointment, and I think would be bearish for oil prices today and tomorrow, because 1 million off a total combined size of OPEC of around 32.5-33 million that's not enough to make any type of impact to lift the price of oil. This is, this is very similar to the type of situation we were in back in February of 2016 when oil fell to the very low price of $26. You know, if you cut production, you meaningfully take a lot of supply off the market in order to tighten it, so you boost prices. You can't just cut by 800,000. You're better off doing nothing because 800,000 has absolutely no consequence on the price. You need to be cutting at least double that for it to have any type of impact. And of course, then Russia needs to be on side as well. So, you know, this was always the risk. And the risk is, is that can Saudi, under this type of pressure from America, seriously step in, knowing that that's going to ratchet up and make things even worse politically for MBS? This is what we're, we're going to find out today. So for me, on the balance, given that assessment, I would say the risk here is to the downside. Let's not forget, in the context, in the backdrop, there still is an overwhelmingly large amount of supply in the market. Whether it's from Russia, whether it's record production as it is today in Saudi Arabia and America, UAE, Libya, all these different countries. And so, you know, the trade war coming back on, i.e., the unwind of the trade truce, yes, that's been a negative immediately for equities, but don't forget, that's a negative for the demand side of the equation. So we've had a bit of a reversal here. If they don't cut, obviously supply remains at these punchy elevated record levels, and with the Trump trade truce disintegrating by the day, the demand now on the prospects of future economic growth is also diminishing. This is driving then fundamentally what would be a bias to be short the oil market. So key point here is if we can break this range, if that does play out to be true, I think we'll get down and test $50 again pretty quick. And if that happens, well then this is when the big questions come, because at $50, where do we go from there? We've managed to bounce quite nicely. We bounced about nearly $5, but we've already paired half of that. If we break $50, like we were saying before, $45, $41 are big levels to the downside. And when we start clearing these psychological barriers, then you see price run very quickly. You saw that on the descent through $60, through $55, how quickly the oil market can move. Now the point being here is that if we did breach $50 with more conviction, we got to $45, I think that's then when you start to hear Donald Trump take his foot off the pedal a little bit and he will start lightening then the aggressiveness of the threats against someone like Saudi Arabia, because at this point he'll be— you'll start to see, um, and the intensity of press coverage about the struggling nature of how U.S. corporations in the energy sector have funded themselves and the troubles that they could run into. Given how leveraged that they are. And so then at that point, the price might bounce from there. Here is still questionable in my mind. So yeah, OPEC, probably one of the biggest things happening at the moment, and definitely is going to pick up pace. Just looking at the price from this morning, as I said, we've gone up a dollar, we come back a dollar. There's going to be a lot more of that. If you're new to the market, you've got to ask yourself some serious questions. Of unless you really have a finger on the pulse watching Twitter, or you, you know, you're able to react very quickly to the squawk and things like that, you've got to ask yourself, is it really worth me trying to attempt to trade oil? Not unless we get a no cut at all, a cut of 1.8 million, way off on each end of the scale, and you see a much bigger, cleaner move in the market. Otherwise, if you are going to start hitting some of the short-term price action, then just be realistic about the time frame, the duration you're going to hold your trade, because when you're in a position of risk and exposure, there's a very high likelihood that a counter comment will come out that says the exact opposite of what you potentially might have been looking at, uh, just a few minutes ago. So if you're going to execute, you're going to have to be fairly prompt Don't get greedy and just book it and scale out of the positions as soon as possible. Similar thing here for cable. Let's take a slightly different tact, just looking at cable here. And I mean, look at this graph. I mean, it's just up, down, up, down, up, down. This is absolutely reflective of the political situation that is unfolding for Theresa May at the moment, and it's complete uncertainty about where do we go from here over the coming weeks. I mean, you've seen the number of flow diagrams, the options are numerous, and what it is is that the issues at the moment are very much over the legal technicalities. And quite frankly, even when I'm reading the news and listening to the parliamentary votes like we did two nights ago, when Theresa lost 3 key votes about giving basically the Commons a little bit more power about a Plan B if it got to it. You know, these things I find very complicated, and I don't know, these are all things that, you know, I've never encountered before because there is no precedence for it. So you've got to ask yourself again, if you are not comfortable in that environment, and let's say you've not been trading that long, is it really a sensible thing to be trading such volatility when it's so seesaw, particularly when it comes to, to politics and trading those types of headlines. So, you know, a couple of guys in the Trading Live room— I know Alex has been staying well clear of sterling, and I think that's a pretty prudent play because there's plenty of other stuff going on in this market. And that's the beauty of trading multi-asset. And obviously you're keeping an ear out if we do get that kind of outlying situation— Brexit off, no deal, Theresa resigns, so on and so forth— then sure, you'd be remiss not to hit it and trade it. But other than that, there's a real heightened risk of getting this wrong when you're trying to trade it because there is no definitive direction at the moment. To sum that up, you know, this is a 60-minute candlestick, and just looking at the, the kind of trend channel from going back to mid-November, you know, we are right bang in the middle of it at the moment. So it's a little bit difficult to judge. I mean, look at some of these price swings that we've had. So, you know, maybe playing this range, sure, but really I'm more interested about the bigger levels on the long term. You know, this is that daily chart, the previous year-to-date low which we threatened two nights ago, and then you've got the April summer lows which was also resistance at the beginning of that year. For me, this is the critical area, and that if breached, then things get interesting very quickly, because if we did come under pressure here, and I do think that there's a lot more headache to come for Theresa ahead of the vote which we're going to get next Tuesday, the meaningful vote, then that could quickly escalate and we could see numbers in the 1.25 handle very quickly. So, you know, that potentially is a little bit more manageable under those circumstances rather than getting involved at this point, you know, like here trying to short pivot, things like that. I don't know, for me, I just don't have a lot of conviction in that type of strategy at the moment for the pound. Okay, let's have a quick look at the calendar and then we're going to wrap things up. So remember, because of the market closures and the holiday in the US, then we do have a slight delay on some of the economic data. So ADP National Employment from the US, which we would normally see on a Wednesday, is coming out today. And this of course sets us up nicely for Non-Farm Payrolls on Friday. Payrolls— my thoughts on payrolls for many months have been it's you know, from a job creation point of view, it's largely redundant. But from a wage perspective, it continues to be very important. But this payrolls, I think, could be very interesting for the sake of the slight dovish turn that we've heard from the Fed. Just imagine if the wage data dropped off significantly in average hourly earnings. Well, this is only going to propel this belief that the Fed certainly are going to alter come the middle of this month, their projections for 2019 rate hikes. Or imagine the opposite— wages continue the trend and continue to move higher, and in fact if they spiked up, well then I'm sorry Jerome, you've not got much choice. You need to be thinking of hiking rates, and that's the worst possible thing for the equity market. Then you might see those downside levels in like the S&P 500, for example, be tested if this trade war re-escalates. Remember, the trade war truce has lasted the grand sum of about 24 hours. It was supposed to be 90 days. Looking at the calendar for the European session, there is, from an economic data point of view, nothing coming out, you know. So it's all a US-focused session in terms of the data releases. ADP 115, US trade at 1:30 alongside the weekly jobless claims, CAD trade balance, ISM non-manufacturing. So keep an eye out for the employment component of the non-manufacturing number as it comes out this afternoon. Durable goods, but these are revisions, so I wouldn't stress too much on that. But you do have US factory orders. So basically we've got a bit of a backlog given the, the holiday from yesterday. Also given, as per usual, whenever it's delayed, the oil inventory numbers are going to come out at 4 PM. So I'll recap the APIs that we saw on a regular release on Tuesday night ahead of this event. To have a look at. But of course, this just adds another very interesting dynamic to the trading day for oil. You've got OPEC to navigate and you've got the oil inventories to, to look out for. And so, I don't know, for me, I'm expecting a decent down day for oil. And check that out, just as I said, oil just breaking that level. So WTI crude, fresh session lows, 52 just taken out. So we've just taken out the weekly range. So this is what I mean, the noises we've had so far, you, you've prepped it up now. The market expects, don't let us down. But the problem is delivering is difficult for the reasons that Saudi have with the US. So here we are now, we've just broken that 52 handle, which is the range, and and also pretty decent technical point of resistance prior to this week. So keep an eye on oil. It's going to be a fluid product for today and something definitely you're going to have to, uh, be quite careful of if you are going to think about trading it. All right, going to leave it at that. Things are obviously moving. Any questions, let us know in the chat room. But have a good day, stay safe out there for the reasons I just mentioned. Good luck.