Saudi Arabia and Russia remain firmly in the driver’s seat when it comes to the oil market. Last week, the Russian deputy PM had given a heads-up that Russia could extend oil export cuts, and confirmation of this combined with Saudia Arabia’s production pullback also rolling forward meant that the oil price only looked at going in one direction, namely upwards. It remains to be seen how long the news that these production cuts being extended for the rest of 2023 sustain the oil market.
The WTI contract had a look beyond the $87 per barrel level while Brent hit $90 as both contracts hit new heights for the year. This, despite Chinese growth struggles, however demand from elsewhere such as India appears to be filling the void to some degree. But any demand-side concerns are being smoothed over with OPEC+ essentially ‘pulling the strings’ and moving the oil price ever higher. It’s also worth noting that oil is at the 2023 highs despite the high USD valuation, meaning that should the greenback come off the boil at some point there is potentially more room to the upside for the oil market.
The ascent in the oil price had a knock-on effect in the bond market, with treasury yields resuming the climb. Rising energy costs have inflationary implications which is why the jump in oil translated into a spike higher in bond yields. Whilst disinflation has been occurring in the global economy (as inflation is well down from the 2022 peak), higher energy prices have the potential to throw a spanner in the works. Therefore, it is not a given that we have completed the rate hiking cycle. The rate of disinflation between now and year-end will tell the story.
The jump in treasury yields served the USD well with the greenback notching new multi-month highs. The DXY (Dollar Index) is on the cusp of the 105 level (highest since March this year). If treasury yields start to settle down, so too will the USD, but if markets get skittish this could give the greenback some additional safe-haven momentum. Euro, Sterling, Kiwi and Aussie all took a step back. In the case of the AUD, the currency is not having the best of weeks having slipped to fresh 10-month lows on the RBA-hold, USD strength and Chinese concerns. Today saw the release of Australian GDP numbers which came it at 0.4% for the quarter, in-line with expectations.
With the USD on the march higher, the gold price faltered. Spot gold slipped 0.6% and was seen trading around $1925 during Asian trading hours. The higher yields/higher USD combination increased the opportunity cost of holding the precious metal and the result was that gold took a turn lower. For the time being, gold remains on the defensive with higher US yields in the limelight.
Looking ahead, Chinese Trade Balance data will capture the market’s attention (due for release on Thursday), with the import and export numbers to be closely scrutinised after the dire readings last time around when both fell sharply. Investors are monitoring for any signs of optimism from China which so fare have remained elusive. Let’s see how the numbers pan out on Thursday.