The Tale of OPEC and US shale

The growing optimism over big oil-producing countries extending output cuts to mitigate oversupply woes propelled WTI Crude to a fresh monthly high at $51.76 on Wednesday.

Although OPEC and Non-OPEC members have, on repeated occasions, exploited oil’s sensitivity to generate speculative boosts in prices, this may come at a heavy cost if oil markets fail to rebalance. While WTI Crude is likely to appreciate higher if OPEC and Non-OPEC producers extend the current output cut deal by another nine months, the question remains of how U.S Shale will react.

I believe that U.S Shale is a significant threat to the OPEC deal, especially when considering how the surging output from the U.S has seized market share from other OPEC members. With the production cut agreement still not legally binding and no punishments in place for those who don’t adhere to its stipulations, there remains a strong temptation for individual countries to cheat in a bid to gain more market share.

The bearish sentiment towards oil remains intact amid the oversupply concerns with the “prisoner’s dilemma” between OPEC and U.S Shale limiting upside gains. While it may be too early to say that this is the end of OPEC, U.S Shale has considerably weakened the cartel’s grip on the global markets. From a technical standpoint, WTI Crude has staged an incredible rebound on the daily charts with prices breaking above $51.50. Intraday bulls could exploit the upside momentum to send oil prices higher towards $52.

Fed meeting minutes in focus

The Greenback experienced a technical bounce on Tuesday with prices trading towards 97.40 as investors offloaded bearish positions ahead of the anticipated Federal Reserve meeting minutes this evening. A sense of uncertainty over Trump’s ability to implement the proposed fiscal policies has left investors on edge with questions being raised over the potential impact on the Federal Reserve.

While most expect the pending minutes to reinforce expectations of a June rate hike, investors will be searching for further clues on when, or if, a third rate hike is still on the table. With economic data in the States becoming increasingly mixed and the Trump jitters returning with a vengeance, the prospects of a third U.S interest rate increase in 2017 could come under threat.

From a technical standpoint, the Dollar Index remains under pressure on the daily charts. A breakdown back below 97.00 should encourage a further depreciation lower towards 96.00.

Sterling searching for direction…

The fact that Sterling has struggled to maintain gains above 1.3000 on repeated occasions despite the Dollar’s weakness continues to highlight how the currency remains gripped by Brexit uncertainty. With soft economic data from the UK and anxiety over Brexit weighing heavily on investor sentiment, Sterling remains at risk of depreciating sharply if bulls fail to conquer 1.3000.

Investors may direct their attention towards the second estimate for the first quarter GDP report released on Thursday which should provide some further insight to how Brexit has impacted the UK economy. An unexpected decline in the second estimate will most likely invite Sterling bears. From a technical standpoint, a breakdown below 1.2900 on the GBPUSD may open a path lower towards 1.2775.

Commodity spotlight – Gold

Gold prices edged lower on Tuesday as the combination of profit taking and a slightly appreciating Dollar attracted short-term bears to attack. Regardless of the recent declines, Gold remains supported on the daily charts with the persistent Trump uncertainties limiting downside losses. While Gold could face some punishment this evening if the Federal Reserve minutes cement expectations of a June rate hike, the Trump jitters should instill enough encouragement for bulls to remain in control in the medium to longer term. From a technical standpoint, Gold bulls need to break above $1260 for a further incline towards $1275.