Oil: Failure to reach output freeze agreement boosts yen - MUFG

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Apr 18, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    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.”
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