The week kicks off on a mixed note as US President Joe Biden called Putin a ‘butcher’ and said in a speech in Warsaw that ‘for God’s sake, this man cannot remain in power. Then, the news that Shanghai is going to a phased lockdown didn’t help lifting the mood in Asia.
Oil, which rallied last Friday on news of a drone attack on a Saudi storage facility, slumped again this morning to $110bp.
The new shutdown measures due to covid are expected to be short-term road bumps on a long up-trending road, as the impact of the lockdowns on medium-term oil demand will certainly remain limited, whereas the tight supply concerns – which are amplified by the tensions in Saudi with the Houthi rebels should keep oil prices under a decent positive pressure.
Investors wonder if OPEC will finally boost its oil output to counter the Russian supply disruptions at this week’s meeting, as a potential boycott on Russian oil could lead to a 3-million-barrel fall per day from April, even though the Europeans are not up for banning the Russian oil for now.
Then comes the question of whether the OPEC+ makes sense for the OPEC countries, if Russia starts seeing a significant demand fall for its oil. So far, OPEC stood behind the OPEC+ agreement.
It is reported that OPEC’s scare capacity has fallen to between 2 to 3 million barrels per day, mostly concentrated in Saudi Arabia and the UAE, and the falling OPEC capacity could explain why the OPEC+ agreement is still alive.
To conclude, the war and the worries of falling capacity from OPEC are more disturbing than a Shanghai lockdown. Therefore, the price pullbacks are still seen as opportunities to buy a dip for a further extension of the rally toward the $140/150bp level. On the downside, the 50-DMA, which stands just below the $100pb level should continue giving a solid support for a further rise, unless there is a significant and a material change in the geopolitical situation which would favor a medium-term decline.
U.S. dollar up
The US dollar begins the week on strong footage, as the dollar index advances above the 99 mark on geopolitical tensions and the Fed hawks. The US 2-year yield just can’t move higher faster, it’s already testing the 2.40% to the upside, while the 10-year yield is just a touch above the 2.53% mark, hinting that the inversion in this portion of the curve is imminent. The 5-10 year spread already inverted and the 5-30 year spread slipped below zero for the first time since 2006, as well.
The flattening and the inversion of the yield curve bring about the worries of a recession in the US, but Fed Chair Powell is pushing back against concerns that an inverted yield curve would signal the economy is headed for a recession. He says that it makes more sense to focus on the shorter end, where curves remain steep. In reality, there is nothing he could do about it, as the inflation problem needs to be addressed fast.
The EURUSD slipped below the 1.10 mark on the back of a stronger US dollar, and there seems to be little that the ECB hawks could do against such a strong US dollar right now, even with the prospects that the rising inflation in Europe would force the ECB to become more aggressive on its tightening plans.