Daily Market Color

Oil Surges as Non-OPEC Members Agree to Output Reduction

Jeff Davenport

Further Production Cuts Expected as Non-OPEC Members Join Accord  Saturday’s meeting in Vienna successfully resulted in another agreement that is expected to reduce output by an additional 558,000 barrels per day, as non-OPEC members, led by Russia, signed on to OPEC’s broader price-stabilizing effort.  Between this most recent accord and the deal made two weeks ago, production cuts have now been extended to countries, who together, supply nearly 60% of the world’s crude oil.  In addition to announcing the pact, Saudi Arabia’s Energy Minister Khalid Al-Falih surprised markets as he explained his country’s willingness to contribute a greater share of cuts than previously agreed upon.  “I can tell you with absolute certainty that effective Jan. 1 we’re going to cut and cut substantially, to be below the level that we have committed to on Nov. 30,” Al-Falih said Saturday.  He went on to explain that Saudi Arabia was ready to take production below 10 million bpd, a level that the nation has been above since March 2015.  With the expectation for a barrel of oil to reach as high as $70 by the end of 2017, the price of crude oil jumped as much as 4.5% during the day, before settling up near 2%.  WTI crude now sits near $52.55/barrel while Brent crude has jumped to $55.45/barrel.  It is projected that the deal could erase half the global oil supply glut within six months.

Political and Regulatory Decisions Highlight Global Activity
Abroad, shares in China plunged after stricter rules pertaining to stock purchases made by insurance companies were publicized over the weekend.  The Shanghai composite fell almost 2.5% on the day as officials explained their plan to curb “barbaric” stock acquisitions by insurers.  Stocks in Hong Kong also declined, shedding 1.35% as the regulatory news added to the update that the region’s Financial Secretary John Tsang resigned his post for a different role.  In South Korea, protests resumed in the wake of an indictment of two former government officials.  The corruption charges came just days after Friday’s parliamentary vote to impeach incumbent President Park Geun-hye. 
Shifting regions to South America, Venezuela made headlines after the decision was made on Sunday to remove the country’s highest value banknote, the 100-bolivar.  President Nicolas Maduro announced that the goal was to eliminate the hoarding of Venezuelan notes by gangs abroad, citing that there were “entire warehouses full of 100-bolivar notes in the [Colombian cities of] Cucuta, Cartagena, Maicao and Buaramanga.”  Effective Wednesday, Venezuelans will have ten days to exchange any existing notes for coins and new bills.  Currently, there is estimated to be six billion 100-bolivar notes in circulation, with half of that population being in the possession of gangs.            

Stocks, Bonds Fluctuate Ahead of FOMC Meeting
While the decision to increase borrowing rates is all but certain for this Wednesday’s FOMC meeting, the future pace of rate hikes remains to be determined.  In anticipation of the meeting, US stocks were mixed on the day, with the DJIA gaining 0.12% while the S&P500 fell 0.12% and the Nasdaq declined 0.61%.  Treasurys sold off to begin the day, as yields/swap rates increased 1-7 bps across all major maturities before rallying back to finish near even for the session.  The yield on the 10-year touched as high as 2.53%, a level not seen since October 2014.

Jeff Davenport

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