Morning Commentary: Crude Intentions

Foreign Exchange - Morning Commentary

Crude Intentions

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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Markets are once again quiet, continuing the theme from Friday as basically every market in Europe remains closed on holiday, and Japan begins counting down to its Golden Week holiday. 
 
One market that hasn't been quiet is the crude market.  Crude prices are currently up ~2.2% on the session as the U.S. has announced that it will not renew its waivers allowing countries to buy Iranian oil without facing U.S. sanctions.  The current set of waivers - issued to China, Greece, India, Italy, Japan, South Korea, Taiwan and Turkey - expire May 2.  U.S. sanctions were put in place in hopes of reducing Iranian oil exports to zero, cutting off the Iranian regime's principle source of revenue. 
 
In an effort to reduce the impact of these sanctions, the U.S. has reportedly secured commitments from producers such as Saudi Arabia and the UAE to offset the reduction in global supply.  However, there will likely be side effects to this decision.  If Saudi Arabia and the UAE were to increase production, it could complicate the output agreement among OPEC nations and its allies.  In an ironic twist, this OPEC production deal was put in place after Saudi Arabia was blindsided by the U.S.' decision to grant waivers, a decision that pushed oil prices down into a bear market. 
 
As a final point, the U.S.' Iranian sanctions could also have an impact beyond Iran and the oil markets.  China, the largest buyer of Iranian crude, has reiterated its opposition to unilateral sanctions and has accused the U.S. of reaching beyond its jurisdiction, adding yet another complication to the trade talks between the two countries.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • The U.K. Parliament returns from its recess tomorrow and is expected to bring back more Brexit related headlines with it.  As it stands, cross party talks with Labour don't appear to be going anywhere. 
  • PM May appears to have been given an ultimatum from her party to step down by June or be ousted.  It has been reported that ~70% of Tory MPs want May to resign, however it should be noted that current rules do not allow a challenge to her until December.
  • Multiple Central Banks, including the Bank of Canada and Bank of Japan, meet this week. In Canada, the BoC is likely to confirm an extended pause in its tightening cycle.  In Japan, the BoJ is expected to downgrade its inflation and reinforce its dovish stance. 
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