Crude oil gets political
Tightening supply is pushing oil prices higher. The USA has sanctioned Iranian crude exports, while at home capacity constraints and pipeline bottlenecks are tightening, and inventories have hit their lowest level since 2015. This, despite US crude production reaching an all-time high June. OPEC and exporting countries such as Russia are discussing raising output to counter the falling supply from Iran, but raising 1.3 million extra barrels per day is not easy. Saudi Arabia and Russia recently decided against additional production increases.
They are defying US President Trump’s demands for lower prices. Oil-sensitive currencies have firmed as OPEC resists an output rise and Brent crude climbs through $80.66. Traders are forecasting $90 per barrel by years end and $100 by early 2019. We continue to see Brent outperform WTI yet rise, as commodity curves are increasingly bullish. Which in turn will support US energy companies earning outlook. Higher crude oil prices will have a negative effect on consumer discretionary as household spending slows.
Italian budget won’t break Euro bank
Budget talks in Rome end on Thursday, and there is risk that it could exceed investors’ expectations, putting additional pressure on the Euro. Early September estimates were 1.50% of GDP; recent estimates are 2% – still below the EU’s 3% limit. Accordingly, we expect minimal impact on the EUR, as long as the 3% threshold is not breached. A 2% budget will be positive for Italian assets. Trading along 1.1742, EUR/USD is expected to approach the 1.1720 range short-term.
Is the budget realistic? Considering that Italy remains the second largest debt-bearing country (as a % of GDP) after Greece and 24% of its borrowings come from Eurozone states, we expect further opposition from the EU, which will either reject the spending plan or ask for looser fiscal policy, i.e. lower spending. Here’s a wild card: Italy’s ruling coalition is willing to implement a 15% flat tax and increase welfare for poor across the country.