An OPEC+ meeting that fails to wrong-foot market players. Who would have thought such a thing was possible? The OPEC+ monitoring committee met in the zoomsphere yesterday, a day earlier than planned. And unlike previous gatherings this year, the group failed to deliver any surprises as it stuck to plans to start easing oil output cuts from next month. It added that overall conformity to the production adjustments was 115% in March 2021, reinforcing the trend of high conformity by the participating countries. All the while, the producer alliance expressed concern about rising virus cases, especially in India. The country’s new Covid cases held above 300,000 for a sixth consecutive day on Tuesday. Nevertheless, OPEC+’s decision to increase supply despite the resurgence in Covid infections suggests it remains optimistic over the near-term oil balance.
The business-as-usual approach adopted by OPEC+ gave oil prices a lift. Brent rallied 77 cts/bbl to settle at $66.42/bbl while WTI finished the day $1.03/bbl higher at $62.94/bbl. This solid performance was however missing on Wall Street where major stock indexes held steady at near record levels. Caution returned to the fore as the Federal Reserve began its two-day policy meeting. On a more encouraging note, a gauge of US consumer confidence hit its highest level since the pandemic began. Returning to the oil market, attention is shifting to an update concerning US oil inventories. The API set a bearish tone overnight after reporting that US crude stocks rose by around 4.32 million bbls last week. If confirmed by the EIA later today, it would mark the biggest weekly gain since early March.
The dollar rallied sharply in the opening months of 2021. The US currency jumped 3.6% in the first quarter against a basket of its major peers, its best run since 2018. This came on the back of a fast vaccination campaign that appeared to signal that the world’s biggest economy will recover more quickly from the COVID-19 doldrums than most other developed nations. What’s more, it coincided with a rally in bond yields spurred by expectations for higher inflation rates in the US over coming months and years as the country’s economic recovery accelerated.
More recently, however, this strength has been largely absent. The dollar index is languishing around an eight-week low having lost around 2.5% since the start of this month. This will be music to the ears of oil bulls. After all, a weaker dollar makes oil less expensive to users of other currencies. For now, the April pullback in the dollar remains well and sound. Yet what comes next for the dollar will depend in large part on whether the Federal Reserve responds to the more aggressive inflation outlook.
Up until now, the central bank has been downplaying rising inflation expectations despite recent strong economic data which point to accelerating economic recovery. Expectations are that similar language will be repeated at today’s policy update given that Treasury yields are near their lowest in five weeks. In other words, it will likely reiterate its accommodative stance and pledge to support the economy by keeping rates low and printing dollars for the foreseeable future. Needless to say, this will provide scope for further dollar weakness.
Alongside the mega-accommodative stance from the Federal Reserve is the prevalence of risk appetite. Global stock markets have rallied to record levels as investors price-in a strong economic recovery after the pandemic slump. The latest spike in Covid-19 cases in countries from India to Japan has failed to upend the improved global outlook. The battle against the pandemic is being won, albeit slowly. This should ensure that risk appetite continues to grow thereby leading to the closing of safe-haven dollar trades.
All in all, near-term conditions are making for a solid source of support for the risk complex and a driver of dollar weakness in the coming months. Underscoring this sentiment is the increase in bearish speculative positions on the US currency. According to CFTC data, money managers increased their short positions on the US currency to 4,586 lots from 2,631 in the three weeks to April 20. This suggests that bearish calls are rising after the dollar’s negative run and that it might be headed for a prolonged downtrend. Simply put, despite its tentative stabilisation in recent days, the dollar index is poised to witness a further decline. This spells bad news for dollar bulls but will be quietly applauded by those betting on a sustained recovery in oil prices.