Afternoon analysis 10.11.2016

The International Energy Agency informed that OPEC increased oil production. The global oil production is increasing as well. The USD/PLN is at its highest level since June, which is above 4.00 PLN.

OPEC under pressure

According to the latest report from the International Energy Agency (IEA), the OPEC countries were producing approximately 33.8 million oil barrels per day in October. This is significantly more than the initial agreement in Algiers assumed (32.5-33 million). The global supply in October increased as well from 800k to 97.8 million.

The Agency also forecasts that Russia, which is currently the largest global oil producer, will increase its production by 230k barrels per day in 2016 and by 200k barrels per day in 2017. Brazil, Canada and Kazakhstan will increase their production next year as well. In 2017, the production of non-OPEC countries will increase by 500k barrels per day, in comparison to the 900k barrels per day decrease in 2016. An increase in demand will be at the level of 1.2 million barrels per day in 2016, as well as in 2017.

According to the report, the oil market will be oversupplied during the entire 2017, if there’s no agreement and particular Cartel countries increase their production. This would significantly limit the chances for an increase in oil prices, as well as take their decline below their current level.

Oil quotations are currently impacted by slightly improving global sentiment, which is related to the election of the new American president and expectations regarding growth of inflation pace, as well as interest rates. OPEC report for October will be published tomorrow. The production level of particular OPEC countries may appear significant. This especially refers to Iran and Iraq. The Cartel finds it difficult to achieve agreement with these countries regarding the matter of measurements, as well as of production limit. If these countries continue to increase their oil production, this could be negative for oil prices in the short-term, by pushing them near the level of 44 USD per barrel, or even less.

USD/PLN above 4.00

Today, the American currency was above the level of 4.00 for the first time since the mid-July. This is mostly because of the globally stronger dollar. The EUR/USD went below 1.09 and the USD/JPY increased to approximately 107, which is its highest level since July. The market sentiment after the American elections indicates that a faster inflation pace is expected. Therefore, interest rates should also become higher.

This caused the emerging market currencies, including the zloty, to lose. The Polish currency wore-off against the majority of the main currencies. Moreover, the franc went above the level of 4.05 for the first time since July. The EUR/PLN returned to its level from the first half of September (4.36).

Tomorrow’s events

At 8.00 AM, Destatis will publish the final CPI inflation data from Germany for October. The market consensus assumes that inflation will increase by 0.8% y/y (same forecast is to be found in initial reading from October 28th). This increase would be the largest in two years. Inflation has been increasing since April (when it decreased by 0.1% y/y) and it is also expected to grow by 0.2% in month on month interpretation. Increasing CPI inflation from Germany is positive for the euro, because it significantly contributes to an inflation increase within the euro zone.

Tomorrow, OPEC will publish its monthly report for October. The next official meeting of the Cartel is scheduled for November 30th in Vienna. Therefore, the oil prices may be slightly more volatile due to incoming information regarding the oil market. Currently, the WTI oil is near 45 dollars per barrel. This is more than 13% below this year’s peak from October 19th.

At 4.00 PM, the University of Michigan will publish the consumer sentiment index for November. This index has been decreasing since May (from 95.8 to 87.2). This trend can be observed in its components (index of future expectations and index of current conditions). This index had a relatively large impact on the dollar in the past. Therefore, its condition seems significant regarding Donald Trump’s victory in the presidential elections. After the initial overvalue, the markets are currently relatively positive towards this result. Trump’s promise of increasing expenses, as well as of abolishing financial regulations, which were implemented by Barack Obama, have increased the market’s inflation expectations. Therefore, the likelihood of rate hikes became larger as well.

At 7.00 PM, Baker Hughes will publish the weekly list of active drills in the USA. Last week’s result was at the level of 450, which was the best since the end of January. In May, the result was at its this year’s minimum (318). Since then, the number of active drills is gradually increasing. However, the results remain distant from the levels from two years ago (approximately 1600). According to the EIA report from yesterday, the oil production increased in the USA by 2% last week. This could suggest that the number of active drills will increase. Higher oil prices, as well as potential production limits in OPEC countries will most likely cause an increase in production of the American companies. This should limit increase in prices in the long-term.