Another low for the oil markets

Although the oil markets are attempting some sort of rebound as European trading begins, both Brent and Crude opened trading by recording further lows. Brent dropped to $60.92, while Crude declined to $56.71. The bears are continuing to exploit the economic conditions that are aggressively against the oil markets at present. Despite already having dug down through various psychological support levels over recent weeks, there is still no floor in sight. Early morning comments that OPEC will not cut production even if Crude drops to $40, only serve to re-emphasize the longer-term bearish outlook.

The only upside opportunities for Oil at present is speculation of further easing from the People’s Bank of China (PBoC), or USD softness encouraging the momentum to swing higher. It is worth noting that despite the USD weakening on Friday afternoon amid the lower-than-expected US PPI figure encouraging speculation the Federal Reserve will make a dovish comment regarding inflation expectations, both Brent and Crude failed to show any increased demand. The weaker USD provided oil bulls with an opportunity to bounce back, but the failure to do so illustrates that there is just no demand for the commodity.

The fears around an oversupply of oil are refusing to go away, with anxiety around the issue heightening even further at a time when resurfacing questions over the global economic recovery are continuing to dominate headlines and leading to the fear that there will be even less demand for oil.

The main focus over the weekend has been in Japan, where Prime Minister Shinzo Abe was successful in Sunday’s snap election. The JPY is continuing to strengthen with the USDJPY currently finding support around 117.770. The strength in the JPY is likely related to the results of the snap elections, although there probably is some link to investors seeking the JPY while the equity markets continue to face intense pressure.

Regarding Abenomics, one of the concerns surrounding Shinzo Abe center on his decision to delay a second tax hike and how Japan will lower its huge government debt. What some are not realizing though is that the lower commodity prices should help the Japanese government massively. One of the issues with Abenomics is that although the weak JPY boosted export competitiveness, the huge trade deficit always remained because Japan was importing so much energy. This was one of the repercussions of nuclear power plants being closed down following the unfortunate Fukushima natural disaster in 2011. The dramatically lower commodity prices over recent months will at least lower the trade deficit, which should improve government debt.

Although the EURUSD benefited from some USD weakness late on Friday, the pair failed to surpass resistance around 1.2484 and has already opened trading on Monday by moving lower. The pair could see heightened risk this week, with the risk not only being restricted to potential Dollar strength if a hawkish comment arises from the FOMC. Both the Eurozone’s Manufacturing and Services PMIs are released on Tuesday morning, where any further fears over stagnant economic growth would likely encourage the markets to suspect that the European Central Bank (ECB) will be pressured into acting again in an attempt to reinvigorate economic growth.

Despite USD softness, the GBPUSD concluded the week by declining to 1.5694. The pair suffered when it was announced that UK Construction Output had dropped by 2.2% on a monthly basis during October. We have seen the UK housing sector momentum cool off in recent months and I think the decline in Construction Output is likely linked to less housing projects taking place. If this is the case, it would not be great news for UK domestic growth. It is also possibly that GBP bulls might be reluctant to enter the Sterling after finding out on Thursday that the Bank of England (BoE) will soon begin publishing policy decisions and minutes of its policy meetings at the same time. This could be seen as twelve less opportunities for the GBP bulls to learn about any hawkishness from the BoE.

The Aussie has commenced the week by falling to its lowest level since June 2010 (0.8203) following the hostage situation taking place in Sydney this morning.

*Ahmad is chief market analyst at FXTM.        

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