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European shares started trading on Thursday with a softer tone while LCG pricing points to a positive open on Wall Street, that follows a positive session in Asia. The British pound is extending gains beyond 1.31 in a backdrop of broader dollar strength. Gold is little changed while oil remains near yesterday’s high off the back of its biggest daily price gain in four months.
Oil: OPEC meeting begins
The price of oil has shot higher in the leadup to the semi-annual OPEC meeting that starts today. Lower inventories in the US and the prospect of deeper cuts from the OPEC+ alliance point a tighter supply outlook. Trade headlines are flipping back and forth but for the moment they are more upbeat and on the side of higher oil prices.
Today’s meeting is strictly OPEC members, and it seems there is agreement about making deeper cuts to combat oversupply in the market. The bigger issue is tomorrow and bringing Russia onboard. Russia doesn’t face the same political pressure Saudi Arabia does in keeping oil prices high. Saudi Arabia’s expansive budget requires a much higher oil price than Russia’s and the Aramco IPO sets a specific oil price target in its prospectus.
On balance, we think Russia will play ball with its oil-producing allies and accept greater cuts. The US-China trade war has negatively affected the demand dynamic since the last meeting so tweak to the quotas makes sense. The risk-factor is that the US is producing record levels of oil and if the cartel announces deeper output cuts this week, the members collectively lose market share to the US.