Thursday September 29th 2016

The OPEC Deal

Thursday September 29^th  2016

Overview

Today’s it is all about the OPEC deal as the oil ministers said the group agreed to limit production to a range of 32.5 to 33 million barrels a day. The agreement was possible because Iran will be exempt from capping production, a major concession by Saudi Arabia, the group’s dominant producer. The lower end of the production target equates to a nearly 750,000 barrel-a-day drop from what OPEC said it pumped in August -- more than half the forecast increase in global oil demand this year.

OPEC’s surprise deal to reduce crude production isn’t only supporting oil prices, it’s helping drive gains across commodities and the companies that produce them. “Risky assets including equities of energy companies and commodities in general are all surging today as investors pick these with oil prices jumping overnight following the OPEC pact,” a trader said. Despite everyone agrees on a short term upside move, many are still skeptical on a long-term basis as market remains way oversupplied: Goldman Sachs sees the OPEC deal adding as much as $10 a barrel to oil prices, the bank remains skeptical on the implementation of the proposed quotas, even if they’re ratified in November. The focus now turns to the execution of the agreement and history suggests the group’s ability to do this is poor, according to Morgan Stanley. Prices are now trading at 49.12 for Brent and 47.17 for Crude oil; yesterday we saw a sharp move on the upside with the two products appreciating as much as 6% on the day. Today we are consolidating on these levels but a further upside in the short term is very likely.

Coming to the forex EUR/USD is not doing much at all. We had the US Job report, we had Draghi speaking, we had the FOMC but none of this events helped the market to pick a direction. The next good game changer, in order to see some volatility will be the US presidential elections on November 6^th. In addition, we have the Deutsche Bank issue which could end to be pure dynamite if not managed in right way; extraordinary public support may be required. No wonder why traders are sitting on what they have and monitoring the day-by-day news. Last two months range goes approximately from 1.1370s to 1.1050s which are, respectively, a good sell and a good buy if market manage to get there without any major fundamental reasons. On the contrary the suggestion is to follow the “wave” if something big comes out of the three events mention above as movement could extend further.

Metals

Moving to the base metals they all enjoyed upwards movements after the OPEC deal supported price gains across commodities and companies that produce them. This “bullish” piece of news comes after the WBMS confirmed (last week) that all base metals were still deficit during the January-July period, with the copper market undersupplied by 151,000 tonnes. What is more in the previous weeks we had some other encouraging data out China: Industrial production (YoY) at 6.3% vs 6.2%; Fixed asset investment (YoY) 8.1% vs 7.9%; New Loans +948B (yuan) vs exp. +725B (yuan). This again confirms the sings of a more stable economy even though many analysts still highlight the burden of the Chinese’s high debt which may explode if growth had to slow further.

On the single metals we do have still have the Philippine Nickel story going on: only 10 mines - out of 40 in the Philippines - passed the country's environmental audit; 18 mines of which are nickel producers that should halt operations. Tin LME-availability is at 2008 lows but at 1999 lows if we consider the freely available LME  stocks; only 1600 tonnes. On the other hand we see LME-Copper stocks at 380’000 tonnes as today another 10’000 tonnes entered into the LME warehouses: between August 19 and September 8, stock inflow averaged 12,618 tonnes per day (tpd), having averaged 3,198 tpd in the first part of August. More recently it has averaged 3,881 tpd. The run-up in LME stocks was a major factor in keeping the Copper prices skewed to the downside lately. Nevertheless it is worth to highlight that yet Chinese trade data shows refined imports rose 16.3% or 359,000 tonnes in the first eight months (year on year) and apparently market is still deficit (see above).

Trading ideas

Let’s now switch to the technical side of the market with some trading ideas for next week:

Aluminium: as expected buyers did come back in again at 1560$ level and now we are back trading at 1660$. Here everything above 1680$ should be a good short-term sell (scale selling is recommended). Stops above 1720$ as up here we break the longer term down-trend and prices could extend further north. Buyer need to wait a pull-back to 1600$. 

The copper market did perfectly respect as well the 4580/4630$ area which was a key support. We are now trading around the 4830$ and we are getting close to the first good selling opportunity at 4920/60$ with stops above 5000$. To buy the first good level is at 4750$ but with very tight stop losses. Having said that and combining the fundamental news we had, it appears to me that Copper market is rather balanced for the moment and most likely we will see the current price range for a while (2/3 months): 4500$ - 5000$.

Lead did again move sharply on the upside in a very surprising move. Today went through the 2000$ mark; 2033$ at the moment. It is benefitting from the latest good Chinese data and by the reduction in the Zinc/Lead spread which is now hoovering around the 320$ while only few weeks ago did reach a peak of 480$. Now the first good level is at 2050/70$ buyers need to wait the 1960/80$ level.

Nickel also behaved smoothly holding its technical levels. After a double test around the 9600/9700$ support we are now trading back up at 10600$. Given the fundamental situation is now important for this market to make new highs over the 11030$ (2016 highs so far). In this way the uptrend could continue further. First good level to buy are the 10200$ whereas first good level to sell are the 11200$. A come back around the 9600$ would not be a very encouraging sign.

Zinc: the bull story on Zinc is still intact and after a decent pull-back at 2200$ we are now back at 2354$ very close to the 2016 highs. Again very difficult to trade but at least the “buy the dips strategy” still plays out. Good resistance to sell lies at are 2411$. Again, careful of a false breakout over here as a lot of stop losses must lie just about that level. If we go through here it may open the road for the 2600/2700$. Buyer can now step in at 2300$, careful at the 2016 highs though (2372$). We need to make new highs or it may reverse back to 2200$.

Tin is very poorly technical as it does not give much of chance to really pick “levels”. It is a long clearly and it could well continue; buy the dips. Careful in selling it.

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