Oil rallies on Oman tanker fire

Morning Note

Oil rallied on geopolitical tensions in the Middle East while equities started to look like they are range-bound ahead of the FOMC meeting.

Oil jumps

Oil has shot up sharply after slumping to 5-month lows overnight. Reports of an oil tanker being on fire in the Sea of Oman rattled markets and sent Brent up $2 in a matter of minute, but await to see whether this will hold or is an algo-based kneejerk that will be faded. We know that geopolitical tensions in the region are worsening and raise supply-side concerns in terms of short-term outages etc – but with OPEC already curbing output and US production at a record high the market is far less susceptible to a shock.

A surprise build in US inventories was to blame for the drop yesterday and ultimately be more important than what’s happened in Oman. EIA figures showed stockpiles climbed by 2.2m barrels, against an expected decline of around 500k. At this time of year we’d normally see stocks decline but they keep moving higher. More supply, not enough demand. This is squeezing longs and we should see further liquidation in speculators’ net long positions, twisting the screw more.

With the demand outlook so clouded there is no sense that the bear market will end any time soon. Massive US supply has changed the rules of the game and there’s not a lot OPEC can do about it. Brent recovered to the $60.50 area having dropped below $60, before it spiked on the Oman news to trade through $62. Risks skewed to downside – it looks like $50 will be seen before $70. However, we’re in a major support zone and the latest dip could be the second trough in a double-bottom reversal.

Equites retreat

Equities pulled back again yesterday – nothing new in terms of trade, just a loss of stamina it seems. SPX encountered important technical resistance and retreated to 2880 on the close. Markets in Europe retreated as the rally ran out of legs.

European shares were on the back foot again on Thursday but then turned green. Bulls may retake control but until the FOMC meeting Wednesday we may expect the major indices to trade in these ranges. Hong Kong again weaker again amid the protests.

US president Donald Trump says China will make a deal. Well we’ve heard all this before. The markets starting to ignore this rubbish. There is precious little signs that we are even close to seeing a deal done at the G-20. Maybe a top-level handshake between Trump and Xi but hard to see much more.

Trump also said he’s still looking at placing sanctions on the planned Nord Stream 2 pipeline. It’s been talked about before but it raises spectre of increased tensions between Germany and US (see euro below softer). The project is controversial enough within the EU and creates the potential for further fracturing among EU states. On this Trump has many European allies. And as the Mexico farrago showed, Trump is not afraid to weaponize trade/tariffs for the pursuit of non-economic policies. We know he wants EU members to stump up for defence.  It’s not a giant leap to see Trump weaponizing trade to achieve this ambition. One can anticipate deterioration in relations.

Tory race

In the UK political space, the Tory leadership first vote takes place today. It’ll sort some the wheat from the chaff but still doesn’t get us to the final two. But there will be implications for who’s going to pick up the votes later on from the candidates that don’t make the first pass.

Sterling had rallied a touch on Boris’s speech – algos in overdrive most likely – before slipping back below $1.27 again as Parliament refused to back Labour’s motion to take over business and take no-deal off the table.

Euro breakout fades

In FX, the euro inched up a touch Thursday after a fairly significant sell off yesterday that will have stressed bulls. The drop in the euro seems to be down to the Trump talk on Nord Stream 2 and the prospect of a worsening in relations with Germany. Last look EURUSD was trying to regain the 1.13 handle. This breakout looks like Monty’s sluggish, meat grinder approach to Caen.

Meanwhile inflation expectations have been crushed – the markets calling out the ECB over stimulus hints and says you can do more but we’re not sure if it will work. Euro 5y5y inflation swaps sunk to record lows- below 1.2% for the first time. The ECB will be forced to do more.