The oil markets sustained losses yesterday afternoon following the International Energy Agency (IEA) warning that global inventories are set to continue to rise before any possible cut in production. This provided a gentle reminder to traders that the supply and demand equation is still very much present, with the aggressive supply surplus going to remain for some time.
While the recent bounce back has provided evidence that traders remain interested in purchasing the commodity and likely ready to pounce on any indications of slowing production, less production needs to be seen. This will provide the bulls with a stumbling block, while also limiting how high the price of oil can jump in the meantime.
Unless production is definitively cut to lower levels, there will always be a risk of a pullback in the price – like we saw yesterday afternoon. In regards to what will likely next dictate the price action in WTI and Brent Crude, it might be worth paying attention to this afternoon’s US Crude Inventories report. Oil bulls will be hoping for production levels to miss forecasts and provide optimism of slowing oil production but if inventories continue to rise beyond expectations, the commodity will be at risk to extending yesterday’s losses.
The GBPUSD was an interesting pair to watch yesterday, with the Cable at times seen alternating between bullish and bearish momentum, before concluding trading up on the day at 1.5252. Monthly industrial production did miss forecasts slightly, but this has been partly attributed to maintenance work in some oil and gas fields. The manufacturing production figures provided another surprise to the upside, following a trend set last week when a hat trick of PMIs were revealed above expectations and provided optimism that the UK economy has begun the year on the right track.
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Economic data from the UK is muted today, but the GBP currency will face downside risks tomorrow when the Bank of England (BoE) releases its latest inflation report. As repeatedly mentioned, it is no hidden secret to anyone that the BoE holds extremely strong views on inflation, with these having further strengthened since the complete tumble in oil prices. The UK is now facing unexpected deflation risks, which has already eliminated any optimism that the BoE will be raising UK interest rates at all this year. UK inflation levels are already at an historic low but the price of oil continued to crash last month, which also means UK inflation is probably going to be even weaker when the next figure is released later this month.
Caution might be the underlying tone to trading today, with investors eyes likely to be glued to the commencement of the Eurogroup meeting to discuss Greece. There are arguments from both sides to be honest, and I am sympathetic to each. Although the economy of Greece has made progress, the tough austerity measures put in place do mean the citizens are continuing to face hardship. At the same time, this was the result of a dire economic situation and there is a point to be made that if austerity measures were not put in place, the Greek economy would have probably found itself in deeper waters. By renegotiating the loan program, there is optimism that some of this hardship can be lifted and sentiment among the citizens in Greece will rise.
The problem the creditors face is that if it lets Greece have its way, it opens the doors for other nations under loan to renegotiate their debt as well. There is also a risk that anti-austerity parties throughout Europe will try to come into individual parliaments, which is a nightmare scenario for the European Central Bank (ECB) that is repeatedly crying out for further structural reforms to complement its continued efforts to increase stimulus measures. Either way, the Eurogroup meeting is going to be a tense affair and this one is going to be about who is willing to step into the circle and make a compromise first.
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Neither side will want to do this, which makes me suspicious that the risks of Greece exiting the Euro have not yet been priced into the Eurodollar valuation.
Follow Jameel on Twitter @Jameel_FXTM
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