Oil inventories scuttle crude

With oil prices sliding and expectations growing that the hawks are going to prevail at the Federal Reserve, it’s no surprise that equity indices are continuing to trend lower. We aren’t expecting any further meaningful narrative out of the Fed today, so it’s now a case of waiting for the non-farm payrolls tomorrow before we gain any further conformation as to whether we see a rate hike from the US next week – and indeed if we should now expect more than three moves higher this year from Janet Yellen.

The Traders’ View

Our prop desk has been active across multiple asset classes overnight, with sell orders on the DAX being extended and some bargain hunting emerging after oil’s foray below $51. We’re also seeing buying of EUR/USD and GBP/CAD.

Fundamental Analysis – Oil inventories scuttle crude


Yesterday afternoon we saw a huge spike in the weekly US oil inventory figure, with a build of 8 million barrels of crude on the week being printed - more than four times higher than had been forecast. That’s underlining the efficiency of current US shale extraction operations and also undermining the Opec lead attempts to limit capacity in the market. The sell-off took around $2.50 a barrel off the price of front month contracts in a matter of minutes, but the risk now is that this tips the balance for Opec in not extending the six month production cut that is currently in play. A meeting of the cartel in May will apparently decide what happens next in terms of output but any signals before this could create further volatility.

Despite the impressive growth figures for the UK economy that we saw in yesterday’s budget, the needle has barely moved for GBP crosses and the pound remains very much on the back foot. Concerns over the Brexit process remain high on the agenda and with no meaningful UK data on the agenda today, the risk is that downside pressures could continue to build.

The Australian dollar has come under renewed pressure overnight as Chinese inflation fell well short of expectations. AUD/USD is now threatening a test of the 0.7500 level, although the key drivers here are likely to be further weakness in commodity prices or some much awaited news on Trump’s plans for border taxes, rather than the more mundane scheduled economic releases. Clearly anything that suggests the US will need to take a more aggressive stance over monetary policy tightening could also drive sentiment, but by all accounts tomorrow’s non-farm payrolls will be the first opportunity for this.

We have the latest ECB rate verdict due at 12.45pm GMT, which is expected to show no change, but the subsequent press conference from 1.30pm GMT could inject some life into the market. It’s going to be a shift in the subtle aspects of the narrative that has the potential to provide some price action, so anything that looks like forward guidance or hints at when the QE tapering might kick in could serve to cheer the common currency. Upside against the greenback may be limited by the prospect of the Federal Reserve taking a more aggressive stance in 2017 than had been originally expected, but there’s arguably more potential against currencies like the pound.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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