Oil prices rose on Tuesday continuing to develop modest upside momentum on Wednesday. WTI has broken the $70 per barrel mark for the first time since October 2018. The API data indicated a 2.11 million barrels cut in US oil inventories on the reporting week, raising the chances of a positive EIA report on inventories, which is slated for release today. Optimism about demand continues to drive price increases, which is partly justified by the fact that the pandemic is receding. The daily increase in the number of new cases of Covid-19 continues to decline while some health officials, like the head of the Ministry of Health of Norway, make extremely optimistic claims that the pandemic is nearly over.
OPEC acts as a counter-argument for the current oil rally, or rather, the cartel's excess production capacity of 6 million b/d. It is clear that these capacities will be gradually put into operation and, if this is done in a weak market or coincides with the deterioration of the demand background, (as was the case in March) prices may repeat the correction. Now OPEC production caps are factored in prices, however signals of improvement in demand continue to come. Prices will come under serious pressure closer to the next OPEC meeting.
Another important indicator of the market movement towards the reduction of excess oil reserves was the narrowing of the Brent-WTI spread. Now the WTI discount is only $ 2.3 per barrel, this is the lowest since November 2020 and indicates a faster expansion in the United States.
A short-term oil forecast from the EIA published yesterday showed that forecasts for the recovery of shale production in the United States for 2021 and 2022 have not changed much. This also supported prices, as it was the recovery in US production that prevented OPEC from effectively exercising control over the market.
The mix of the fresh upside leg in oil, declining chances an early QE tapering by the Fed and a flight of inflation to the Russian Federation in May sharply boosted appeal of carry trade, since the chances that the Central Bank of Russia will sharply raise the rate (for example, by 50 bp), thus expanding the differential rates, have gone up. The CBR meeting will take place on Friday and USDRUB is likely to continue to decline rapidly on positive expectations:
The major currency pairs remain in narrow ranges today in anticipation of the key US inflation report for May for this week, as well as the meeting of the European Central Bank. China released inflation data that pointed to an unpleasant trend of contraction in production margins (CPI falls, PPI rises), forcing the authorities to announce price controls. The key takeaway from the data is that inflationary pressures in the world continue to build up, so tomorrow we may well see an unexpected very strong rise in US inflation. However, due to the fact that last May inflation was very low (near zero), YoY gains should be attributed to a good extent to the low base effect, so the market's tolerance to higher inflation rate may be high. A surprise for the market is likely to be core CPI values above 3.7% or above 5% of broad CPI. If the data fails to meet expectations, we can expect a resumption of the downtrend in the dollar, since prolonged pause of the Fed in QE tightening, will lead to rotation into high-yielding currencies away from the USD, since other major Central Banks have clearly more hawkish policy stance.