Oil slides as OPEC+ meet; Markets await key ECB decision

Summary:

• Oil drops on reports of softer US stance on Iran

• Markets await key ECB decision

• Will Draghi deliver in penultimate policy decision?  

There was a sharp drop lower in the price of crude yesterday afternoon, as 4th consecutive weekly decline in US inventories was overshadowed by reports that the US may be set to ease sanctions on Iran. The resignation of White House security advisor and Iranian hawk John Bolton has led to speculation that the US may be about to soften their stance against Iran and therefore reduce the risk of a significant supply shock to the energy markets.The Oil price hit its highest level in 6 weeks on Tuesday as the change in Saudi energy minister raised hopes of a stricter level of compliance in terms of output cuts amongst OPEC+ members. The group are meeting in Abu Dhabi to evaluate their current stance, but reports of improved compliance which would mean a further reduction in output of around 400k barrels per day are being overlooked in the near-term by the prospect of a softer stance on Iran.          

The reports of US considering softening their sanctions on Iran caused a sharp drop in the Oil price. The market has dropped below the H1 cloud and also the 50% fib retracement of the move from the low seen at the start of the month. Source: xStation  

One of the most eagerly anticipated events of the year is nearly upon us with the markets awaiting the latest policy announcement from the European Central Bank (ECB). With the impending exit of president Draghi there’s a feeling that the Italian faces a difficult balancing act with on the one hand wanting to leave a parting gift to his 8-year tenure but on the other not wanting to push stimulus measures towards their limit and therefore reduce the degree of flexibility afforded to his successor, Christine Lagarde. The consensus forecasts amongst analysts see a further reduction in the deposit rate by 10 bps to -0.5% as well as the announcement of some form of tiering process to try and mitigate the adverse impact that a move further into negative territory will have on the banking sector. 

While some form of Quantitative Easing (QE) is also expected, with a plausible base case seen as 30B/month for 9-12 months, there is a chance that the ECB decide against this and hold off for the time being. This scale of bond buying would also likely require changes to the rules on the proportion of debt from any given country that the ECB can buy and due to the contentious nature of this issue it would not be too surprising if they decide to bide their time and leave the decision to the next president. Given the high bar that’s been set by the markets a failure to deliver could cause quite a stir, with the recent gains in European stock markets at risk should they disappoint.   

The German Dax has been on a strong push higher in recent weeks, hugging the upper Bollinger band as the market has rallied. The move has come in no small part due to expectations of a strong dovish move from the ECB today, and if they fail to deliver then these gains could be seen as vulnerable. Source: xStation