US closed for Thanksgiving, European equities higher, Oil slammed after OPEC announcement, ASX futures down 17

With US markets closed and little movement in major FX markets, let's focus on oil - after commenting on its next level of support being around US$67 just two days ago, I didn't expect it to be nearing that point already. WTI crude is at US$69.10 today, just a couple of dollars above its May 2010 lows. I must say I am surprised that the market had not fully priced in the outcome of this morning's OPEC meeting, that saw the Committee decide not to curtail production. While we've been discussing this for weeks now as a fait accompli, it seems there were still plenty of traders holding out hope that the supply of oil from the world's largest group of producers would be cut. While this is a short-term event at this stage, I can't help but see this latest price drop fuel some already powerful dynamics:

  1. The heat on Russia's political leadership gets turned up again - two third's of the Russian government's annual budget comes from taxes on Russian oil and gas companies, which are going to struggle to turn profits in this environment. Up until days ago the Russian finance minister was still banking on US$80-US$90 per barrel oil. So what's going to happen to Putin's planned 2015-2017 increase in defence spending? Yes, this is all just a little too convenient.
  2. The US (and global for that matter) inflation story is continuing to look weak. Is the US Federal Reserve going to rely solely upon the US unemployment rate to justify a 2015 rate cut? I think not. Input prices for producers are falling, these latest drops in energy and commodity prices are still filtering their way through from producer to consumer prices, and the trend for inflation in the US should remain sideways to down.
  3. With little reason to raise rates, the US dollar strengthening theme may be over for now. The USDJPY currency pair will likely remain in limbo while it awaits Japanese elections in December, and it will get little or no help from a stronger US dollar as the market absorbs the worsening inflation story.
  4. This theme of low inflation, low interest rates and low input prices remains a positive for US equity markets. While already at all time highs, this theme is supportive of higher S&P 500 levels as the effects of low interest rates remains in place and beneficial for those companies large enough to take advantage of the arbitrage from borrowing at a low cost and investing in a growing economy.
  5. Already suffering from a hit to iron ore prices, Australia is given even less reasons now to fathom a rate hike. Quite the opposite, from fear of the emergence of a deflationary environment, the Reserve Bank of Australia could well cut rates in order to keep CPI from falling below target. At US$0.8551 the AUDUSD currency pair is already sitting at lows that won't require much to push it downwards; however, without the strengthening US dollar, this along with many other major currency pairs may well see a patch of low volatility and do very little.

Today's first chart shows last night's drop in WTI (orange) and Brent (black) oil prices following the OPEC announcement. The second chart looks at the long-term price of WTI crude and shows a black horizontal price of US$67.15 per barrel, the May 2010 low that may buffer the price in the short-term.

Lastly, I should mentioned US dollar gold's performance throughout this patch of a weakening inflation outlook. As I have repeated, although a low inflation environment is fundamentally bad for the gold trade, I see a distinct lack of willingness from sellers to offload gold at these levels. I believe that the low-inflation story is priced into gold and that it has found a price where most of the speculative froth has been blown from it. Stick to technical support levels on gold with regard to setting stop losses for long trades, but I don't see the emergence of any panic selling from precious metals, rather just some asset rotation out of the asset class that occurred mainly due to ETF selling in early November. Keep this Sunday's Swiss referendum in the diary, but hopefully I'm not being naive in predicting that this will be a non-event and the prospect of a 'Yes' vote that would trigger the need for the Swiss to buy gold has been dismissed from the market already.

Today’s charts are taken from the Rivkin Trader platform. 30,000 global instruments available to trade including FX, commodities, index, ETFs and international shares. Trade Australian share CFDs from just $8 or 0.10%. Click here or phone 1300 748 546 to get your free $100,000 demo account.

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