What the world doesn’t need right now is an escalation in violence within the one country that could potentially raise the rate of oil production due to the spare capacity and proven deliverable oil. Disruptions to the Saudi Aramco facilities have caused market shocks before, but currently, this market is very tight and fragile. CAD will be the biggest beneficiary if this disruption is as bad as it was in 2020, but we all lose as inflation is likely to keep rising. In these markets, you must remain nimble as it was only 24 hours ago that we were getting excited about the northern American energy plan for Europe.
Yemen's Iran-aligned Houthi group for the second time in 2 years has struck the Saudi Aramco site in Jeddah. Today’s attack is a sustained operation with Saudi Arabia announcing they have shot down ballistic missiles and drones. Yet, it only takes one to get through to cause massive disruption. Today’s fire caused WTI and Brent to reverse direction and having taken out yesterday’s lows we could see Brent push back into the $ 119s.
Both Nat Gas and Brent are green today and for the month they are up 4.55% and 27.20% respectively. The attacks on Saudi Arabia, combined with the war in Ukraine have moved the energy markets but overall, the sentiment around risk is positive as we’re seeing a big sell-off in the benchmark bond prices and gold trading under its opening price. China’s state-owned Sinopec has been told to pause Russian projects including a major gas chemical plant in partnership with Sibur. This is due to sanctions imposed on Russia and the threat of sanctions being imposed on China. The US is considering releasing more oil from the Strategic Petroleum Reserve but even if they did it wouldn’t move the needle on prices at the pump. What is needed is a massive increase in production or for the US to stop exporting oil. The US Baker Hughes rig count showed an increase in oil rigs, no change in Natural Gas rigs and a total of 670 operational rigs this week.
The forex heatmap is still mixed, with the key difference being a flip in the fortunes of the CAD and CHF. The rising energy price has boosted the CAD and the Swiss franc is relatively weak compared to this morning’s sentiment. The euro remains within the trading range printed on the 22nd of March but is showing the bears are in control as the week’s session comes to an end after this morning’s ifo Business Climate data point missed expectations.
The US dollar has staged a comeback today, after advertising that it wanted to go lower with a break of the week's rising channel. The bulls have retaken the initiative and could now be gearing up for a breakout of the descending trendline from the recent $99.50 high. This also comes as a report from the International Monetary Fund (IMF) declared the dollar share of international reserves have been in decline over the past two decades as central banks look to diversify their holdings into the Chinese yuan and other currencies. This decline in foreign reserves obviously comes from the weaponization of the dollar through sanctions and the way in which global trade works, but it is still the global reserve currency despite the move into yuan. For all of the greenback’s faults and the shenanigans from the US Treasury and Fed, the system is still in a safe and relatively open/transparent/honest monetary system that most of the world can rely on. Whether you could say the same for the CCP and PBOC is another thing.
Benchmark yields are rising in the US, UK and Germany, with the US gaining on comments from the Fed speakers today. Fed’s Williams is watching the data and says if it is appropriate to raise by 50bps he will back that. The thing no one is talking about is the $4trln in reserves and $2trln in Repo that the Fed will have to pay higher interest on. If they raise rates by 300bps points like some suggest, the Fed will effectively not have enough income to pay the interest payments unless they can ditch the reserves and go for a hard landing. They could defer it, as they are the US Central Bank but that would not make congress very happy.