Morning Commentary: A Historic Distinction Without a Difference

Foreign Exchange - Morning Commentary
A Historic Distinction Without a Difference 
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
After a marathon series of negotiations, OPEC nations and other top oil producing countries finally agreed to a production cut of 9.7 million barrels a day, slightly less than expected. 

Heading into the weekend, this deal looked to be in jeopardy with Mexico threatening to walk away from it.  Ultimately, it appears that Mexico won a slight victory by agreeing to a 100,000 barrel a day cut which is less than its pro-rated share.  Conversely, Russia appears to be one of the biggest losers as it agreed to cut production by 2.5 million barrels, which is more than Saudi Arabia agreed to cut. 

Oil prices initially popped on confirmation of the deal but has since given up nearly all of its gains.  Brent crude’s six month contango has also gotten deeper.   Contango is a market condition where spot prices are lower than futures prices and indicates oversupply. 

The reason for this has to do with the demand side of supply/demand balance which dictates the equilibrium market price.  While the agreed upon production cuts have reduced the supply of oil, the magnitude of the virus driven demand shock is still greater and should continue to pressure oil prices.  As touched upon in past commentaries, shocks may create recessions, but recessions continue long after the initial shock has dissipated as confidence issues linger in the marketplace.  Certainly, the production deal helps as it relieves some of the inventory pressures in the market, but the overall, energy price picture should still be dominated by demand factors.   
  • Positive virus headlines continue to come out with the WHO confirming 70 vaccines currently in development worldwide.  Of these, 3 are currently in clinical trial.  Spain saw its slowest rate of COVID-19 infections in three weeks while Italy extended its shutdown but did allow certain businesses to reopen. 
  • Data flow is light today with all European and many Asian markets closed.  However, data flow should pick up later this week as economic prints covering March/Q1 comes out.  These economic data series should give the markets a better understanding of the impact on economic activity. 
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