Oil prices surged yesterday, following reports that the US was ready to end waivers granted to buyers of Iranian oil. The reports were confirmed later in the day, when the US announced that buyers must end purchases by May 1st or face sanctions. Now, the spotlight is likely to turn to Australia’s inflation data for March, due out tonight, as investors try to assess the likelihood of a rate cut by the RBA in the months to come.
With most G10 markets closed for Easter holidays, and the economic agenda very light, the center of attention was the energy market yesterday. Oil prices surged during the Asian morning Monday following reports that the US was ready to announce that it will not renew waivers granted to buyers of Iranian oil. The reports were confirmed later in the day, when US President Trump’s administration said that buyers must end purchases by May 1st or face sanctions.
Remember that back in November, when the US re-imposed sanctions on Iran’s oil industry, the nation’s eight main buyers were exempted and allowed to continue with limited purchases for six months, a grace period ending next week. Still, yesterday’s reports came as a surprise to oil traders, perhaps as China’s and India’s push for an extension sparked some hopes on that front. Brent and WTI rallied 2.6% and 2.8% respectively on speculation that Washington’s decision would hurt supply in a market already tightened by the sanctions on Iran and Venezuela, as well as the OPEC-led production cuts.
Using his twitter account, the US President noted that “Saudi Arabia and others in OPEC will more than make up the Oil Flow difference in our now Full Sanctions on Iranian Oil”. That said, Saudi Energy Minister Khalid al-Falih did not commit to that and just noted that they will keep “monitoring the oil market developments” and coordinated other producing nations to ensure a balanced market. The next OPEC gathering is scheduled for June 25th, when OPEC and its allies – known as the OPEC+ group – will decide their next steps.
With regards to oil prices, speculation of more supply shortfalls and easing concerns with regards to a global economic slowdown due to decent data from China and the US may allow “black gold” to continue trading north for a while more. However, we will carefully monitor comments and headlines pointing to whether and to which extent Saudi and other oil producers are willing to ramp output back up in order to compensate for the lost Iranian oil. In December, OPEC and its allies agreed to cut production by 1.2mn bpd this year, while the removal of the waivers is likely to drive Iran’s exports to below 1mn bpd from 1.9mn in March. Thus, producers must be willing to return almost all the amount they decided to cut in December if they want to eliminate the effects of Washington’s decision.
Traders and investors pushed the price of oil to the upside on reports that the US will end waivers granted to Iranian oil buyers. Brent oil is still trading above its medium-term upside support line taken from the low of January 28th. The commodity broke above its key resistance at 71.90 and kept on traveling higher, just falling shy of a few points from hitting the 74-dollar mark. We may see a continuation move further up, but before the black liquid could travel in that direction, it could correct slightly lower. We can see by our oscillators on the 4-hour chart that they have topped, which supports the idea of a small correction first.
As mentioned above, a slide back down could let Brent oil to test the 73.00 hurdle, which may act as a good bouncing ground for the commodity. If the bears struggle to push the “black gold” below that hurdle, this when the buyers might take their opportunity in order to drive it back to yesterday’s high, at 73.95, a break of which could open the door to the 75.00 barrier, marked by the high of November 1st.
Alternatively, if the initial correction gets extended and the price falls below the 71.90 area, this might spook the bulls for a while and allow more bears to join in. We will then consider a further slide, which could potentially take Brent towards the 70.77 obstacle, the low of April 18th. But if the selling pressure is still in full swing, another price-drop could bring the commodity towards the psychological 70.00 barrier, or even lower, to test the aforementioned upside line.
Now the spotlight is likely to turn to Australia’s inflation data for Q1, due to be released tonight, during the Asian morning Wednesday. The forecast is for headline inflation to have slowed to +1.5% yoy from +1.8% in Q4 2018, while the trimmed mean yoy rate is anticipated to have ticked down to +1.7% yoy from +1.8%. Both rates would still be below the lower end of the RBA’s 2-3% inflation target range, but they will be near its own projections for the first half of 2019, which are +1.4% for the headline CPI and 1.8% for the trimmed mean rate.
The statement from the latest RBA meeting had a softer tone than previously, with officials refraining from repeating that unchanged rates would be consistent with sustainable growth and achieving the inflation target. Instead, they said that they will set future policy in order to reach those goals. The message we got was that the current policy stance may not be consistent with the Bank’s goals and that a rate cut could be possible in the months to come.
The minutes of that meeting added more credence to how we interpreted the meeting statement. While previous minutes revealed that members saw scenarios where interest rates could go up or down, with the probabilities equally balanced, these ones showed that members agreed that the likelihood of a hike was low. Policymakers also noted that if inflation does not move higher and the unemployment trends up, a rate cut would be appropriate. According to the ASX 30-day interbank cash rate futures implied yield curve, investors now expect a cut in October, and slowing inflation could prompt them to bring that timing forward and thereby hurt the Aussie, especially if the CPI rates fall below the Bank’s own projections.
From around mid-March, GBP/AUD was moving lower, trading below a short-term downside resistance line taken from the high of March 27th. But after hitting support near the 1.8095 hurdle, the pair started showing signs of reversal, forming higher lows and breaking above that downside line. This is now drawing a positive short-term picture in our view, especially if the rate travels above the 1.8235 barrier, marked by the intraday swing high of April 16th and by the low of April 15th.
In order to get comfortable with the upside in the short-run, we would like to see a strong push above the 1.8235 hurdle, which could open the door to some higher levels. We will first examine the possibility for the rate to test the 1.8325 zone, which is the high of April 16th. GBP/AUD could then correct back down a bit and if the rate continues to trade above the 1.8235 area, this could be a good opportunity for the buyers to step in again and drive the pair higher. If the rate-acceleration continues and GBP/AUD bypasses the 1.8325 obstacle, it may end up hitting the 1.8360 barrier, marked by the highs of April 9th, 10th and 11th.
In order to start considering the downside again, we would like to see GBP/AUD moving back to and then breaking the 1.8095 hurdle, which for now is the lowest point of April. This way, the pair would confirm a lower low and the path to the 1.8035 support zone could be cleared. If that zone is not able to withstand the bear-pressure, a break of it may drag the rate below the psychological 1.8000 area, towards the 1.7990 level, which marks the lows of February 14th and 15th.
The calendar appears to be very light today as well. The only releases worth mentioning are the US new home sales for March and the API (American Petroleum Institute) weekly report on crude oil inventories. New home sales are forecast to have declined 5.6% mom after rising 4.9% in February, while as it is always the case, there is no forecast for the API print.
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