Talks of Supply Cut Extension Prompt Surge in Oil as US Stocks Reach New Highs

A central story across global financial markets to open the week was the announcement made by the energy ministers of Saudi Arabia and Russia stating their preference to extend the existing production cutting agreement through the first quarter of 2018.  The deal originally made in January was structured to have a six-month extension option after the first six months, however the officials from the world’s two largest producers recommended the 1.8 million barrels per day curbing should be left in place until the end of March 2018.  Final details of the extension are scheduled to be discussed at the May 25th meeting in Vienna amongst major oil producers.  While skeptics place doubt on Russia’s actual participation in the proposal, crude oil prices surged from the beginning of the session, jumping as high as 3.6% during the day.  WTI crude is currently trading at just under $49/barrel while Brent crude is near $52/barrel, their highest marks in two weeks.  The rise in oil prompted substantial gains in energy and materials stocks, which assisted in pushing major US equity indices to record highs throughout the session. This was the case despite the market gains being somewhat limited by concerns over yet another missile testing by North Korea over the weekend, along with the most recent global cyber-attack that has affected more than 200,000 computers to date.  US Treasurys traded relatively flat on the day with yields/swap rates up 1 basis point or so for the session, stemming Friday’s rally which saw rates fall as much as 7 bps across the curve.  The US dollar recorded its fourth consecutive daily loss, down 0.3% against major currencies today.   

Economic data released on the day included the Empire State Manufacturing Survey for May, which was reported at a seven-month low of -1, where expectations had called for a +7.5 level.  Weakness in new orders (-4.4) represented the largest negative in the survey, more than offsetting strength in prior orders and hiring.  Further clarity on the relative strength in recent US manufacturing is expected to be provided in tomorrow’s release of industrial production data for April.  In a separate report by the National Association of Home Builders today, the housing market index rose more than expected in the month of May to a reading of 70, up 2 points from the previous month and just a fraction below a 12-year high.  The West reported the highest marks amongst the various geographic regions, with a composite score of 80. Overall, the housing data could foreshadow strength for tomorrow’s housing starts/building permits report.