Oil: Failure to Reach Output Freeze Agreement Boosts Yen - MUFG
Lee Hardman, Currency Analyst at MUFG, notes that the yen has
strengthened in the Asian trading session most notably against crude oil
related currencies following the failure over the weekend of major
crude oil producers to reach an agreement to freeze output.
Key Quotes
“It
has resulted in the price of oil declining sharply overnight reflecting
an unwinding of expectations ahead of the meeting that an agreement to
cap production at January levels would be reached which has helped the
price of oil to find a bottom in recent months. The FT has reported that
a tentative agreement broke down after Saudi Arabia decided it could
not be party to an agreement that would give Iran any leeway.
Iran
had refused to join the output freeze and did not even send a
representative to the meeting. The FT suggested that Saudi Arabia had
been looking for Iran to soften its stance perhaps by offering to cap
production at a later date. Some countries are still clinging to hope
that an agreement can be reached later this year although market
participants will remain very sceptical.
The negative impact on
the oil market is most likely to be psychological in the near-term. As
the International Energy Agency stated just last week, any potential
deal to freeze output by OPEC and non-OPEC producers will have a limited
impact on global supply. They noted that “with Saudi Arabia and Russia
already producing at or near record rates and very little upside seen
apart from the Iran, any deal struck will not materially impact the
global supply-demand balance during the first half of 2016.
However,
the IEA did strike a more bullish tone last week stating that “the
much-anticipated slide in production of light, tight, oil in the US is
gathering pace” which will help the market to “move close to balance in
the second half of this year. It supports our view that the price of
oil is likely to continue to rebound gradually in the year ahead despite
the short-term setback from the failure to reach an agreement to freeze
output. Oil related currencies will now find it more challenging to
strengthen further in the near-term following recent sharp gains.”
