OPEC: Supply Glut No More, Oil Prices Set to Recover

Global markets took cues from the OPEC meet and data released this week. Meanwhile, the domestic markets got jittery on Indo-Pak tension.

The Organization of the Petroleum Exporting Countries (OPEC) agreed for a modest output cut during the week. OPEC countries will reduce output to a range of 32.5-33 million barrels per day (bpd) from the present output of 33.24 million bpd.

The deal was struck during talks in Algeria to ease global supply fears.

This is the first such deal since the 2008. Iran too has decided to decrease production by around 0.7 million bpd. Despite these modest production cuts, this move could help oil prices recover.

Until a few years ago, US$100 per barrel was the new 'normal' for oil prices. And then this capricious commodity proved everyone wrong. Early this year, crude oil prices hit US$30 per barrel for the first time in twelve years. The root of this turmoil has been the global supply glut.

OPEC is a major source of the turmoil we've seen in crude oil prices. Check out Asad Dossani's article, How OPEC Lost Control of Oil Prices, for more on this.

Japan saw the outcome of weaker-than-expected consumption and inflation data for the month of August. Spending among Japanese households tumbled last month and consumer prices fell again.

Government figures showed that household spending in August contracted 4.6% from a year ago. This was way below expectations of a drop of around 2%. Core consumer prices, excluding volatile fresh food prices, contracted 0.5% YoY during August. This was the sixth straight month of declines.

Some respite, however, was found on the employment front. The labour market in Japan remained tight in August with unemployment at a multi-decade low of 3.1%. Also, factory output rose a stronger-than-expected 1.5% in August.

However, the overall data raised concerns for the Japanese economy. The BoJ still has a long way to go to reach its 2% inflation target. Last week, the bank issued a plethora of fresh changes to its policy approach. To control the yield curve, the bank said it would introduce a new policy tool they're calling quantitative and qualitative monetary easing (QQE). The bank further announced it would expand the monetary base until inflation gets stable above 2%.

The bank, however, stood pat on the negative interest rates they introduced early this year. The move was introduced to encourage banks to lend more and thereby spur spending and inflation. However, there has been no sign of this working yet.

Along with the BoJ, the monetary policies and low interest rates of other central banks have made things far worse than before for the global economy.

The concern is that global financial markets are behaving obsequiously to Fed and central banks cues. They are highly dependent on central bank behaviour. Bill Bonner recently wrote about how the Fed and the BoJ are keeping investors on the edge of their seats.

If you want to know what's really happening in the world of man and money, you can claim your free copy of Bill Bonner's latest book, Hormegeddon (just pay Rs 199 for shipping and handling).

China's Manufacturing Purchasing Managers' Index (PMI) came in at 50.1 for September. This was seen a touch above the 50 reading recorded in August but below July's 50.6 reading. This shows that activity at China's small and mid-sized firms expanded this month.

Output and total new orders also expanded marginally. And firms raised their purchasing activity for the third month in a row. However, cost-cutting initiatives contributed to lower employment during September.

While the above flagged optimism about manufacturing in China, the property market ignited worries. The real estate market in China, which contributes as much as a third to gross domestic product, is on the cusp of a bubble. This is seen as average new home prices in seventy major cities spiked 9.2% YoY in August. This was also way higher than July's 7.9% increase.

China needs to do better to come out of the ongoing economic slowdown. Sluggish demand and excess capacity are threatening to reverse China's economic engine, which had been moving at a frenzied pace. And lack of transparency in the government and banking entities in China have made it difficult to decipher the reasons for the growth decline.

The need of the hour is to have more credible and trustworthy reports on economic developments. And that is where Nitin Gregory fills the gap. He's provided an on-the-ground look at what drives real estate in China and how it will fare in the short as well as the long term.

Global indices ended the week on a negative note after taking cues from the above developments. Barring Singapore and the US, all the other global indices registered negative returns during the week.

Mr Market Gets Jittery on Indo-Pak Tensions

Back home, Indian stock markets finished the week with losses. The BSE Sensex was down 2.79% for the week, while the NSE Nifty was down 2.49%.

On the sectoral indices front, all the indices fell in the week gone by. Power, realty and capital goods witnessed the maximum selling pressure.

Mr Market in India was nervous on Thursday because of breaking news of geo-political tensions between India and Pakistan. Reports confirmed that India conducted surgical strikes at some terror bases in Pakistan. The Sensex tanked more than 500 points intraday on the news. The kneejerk reaction was also seen in broader markets. As per news reports, by 1pm on Thursday, none of the BSE Midcap Index's 84 stocks were trading in the green. Further, among the 761 BSE Small-Cap stocks, only 27 were trading higher.

The fear among market participants was palpable. The Volatility Index (VIX), a gauge for trader's expectations of near-term risks in the market, based on Nifty options values, spiked some 29%. This was a three-month high.

Volatility and short-term fear ruled. But this is nothing new for the Indian stock markets. And there may be more to come. As Asad says, markets trend.

And our friends at Equitymaster say these market trends could be a positive if one knows how to channel the greed and fear right. Whenever markets suffer panic attacks and fear-driven sell-offs, long-term value investors have the rare opportunity to pick solid stocks at a discount.

Equitymaster's research in March revealed that, in aggregate, the profit margins of Sensex companies were trading at ten-year lows. So, if profit margins were to revert to their long-term averages, the Sensex may hit 40,000 three to four years down the line. To know more, you can download their special report, Sensex 40,000: 4 Stocks to Profit from the Coming Stock Market Wave.

Indian Indices Log Around 2.5% Losses for the Week

Markets started the week on a bearish note with a knock of more than 100 points on Monday. They held on to the support level of 8,700 for the following two days. And just when it seemed like they were ready to head higher, the news of surgical strikes in Pakistan created panic among investors and the Nifty tumbled about 250 points within minutes. The index ended the week at 8,620, down with a loss of 2.38%. Markets have breached the rising channel that was running for the last seven months. It seems the bears will control the index for the near term, and 8,800 will act as solid resistance while support will be around 8,500.


Gold Weighed by Firm Dollar and Weak Global Cues

Gold traded on a mixed note during the week. It opened its session in the red and continued to trade in the red during the start of the week. Losses were seen on the back of a weak trend overseas. Also, a firm dollar weighed on gold. The yellow-metal went on to trade in the red midweek as stock markets soared after the US presidential debate. Slight gains were seen during the end of the week as stocks fell on Deutsche Bank worries and sent gold higher.

Gold Trades in the Red

Silver Trades in Tandem with Gold

Silver traded on a negative note during the week. It opened in the red and went on to extend its downtrend. Most of the losses were seen on the back of a weak trend in precious metals overseas. Also, the cues such as a firm dollar and the US presidential debate weighed on silver. Finally, silver traded in the red and ended its session on a negative note. On the topic of silver, Dan Denning, in Vivek Kaul's Diary, offers some insight on the times when silver does better than gold.

Crude Oil Surges after OPEC Deal

Crude oil witnessed most of the buying interest during the week. It opened in the green on Monday and maintained momentum throughout the week. Most of the gains came after OPEC agreed for a modest output cut during the week. The news ebbed worries of a global supply glut of crude oil and sent prices soaring.

Crude Oil Inches Upward

Mixed Trades for Natural Gas

Natural gas traded on a mixed note. It opened its session in the red on Monday. Losses were also seen midweek. However, the respite came during the end of the week. This was seen as natural gas recovered losses after the US Energy Information Administration (EIA) reported a lesser-than-expected rise in stockpiles. Data showed supplies of the commodity rose 49 billion cubic feet (bcf) for the week ended September 23 as against the expected rise of 54 bcf.


Dollar Trades on a Positive Note

The dollar traded on a positive note during the week. Gains were seen after the OPEC deal and the US presidential debate. During the end of the week. the dollar rose around 1% against the yen and hit an eight-day high. This came as investors moved into riskier assets following an OPEC deal. The dollar also stood firm against the rupee during the end of the week.

USD Registers Weekly Gains

Euro Weighed by Deutsche Bank Concerns

The euro witnessed volatility during the week. It opened its session on a positive note on Monday. However, it failed to continue its momentum midweek. Losses were seen on the back of a firm dollar overseas. During the end of the week, the euro dropped to a two-month low against the safe-haven Swiss franc. This came as concerns about the health of Deutsche Bank weighed on the single currency and undermined risk appetite across global markets.

Sterling Registers Marginal Losses

The pound traded on a positive note during the week. On Monday, it opened its session higher than last month's closing. However, slight losses were seen midweek on the back of a firm dollar. During the end of the week, euro continued its downtrend and ended its session with slight losses.

Yen Witnesses Volatility

The yen traded on a mixed note during the week. It witnessed selling pressure following the OPEC deal to cut oil output and market participants moved into riskier assets. This meant the dollar surged and weighed on safe-haven yen. However, the yen recovered losses towards the end of the week. Upbeat data released during the end of the week sent the yen higher. Despite these gains, the yen ended its session with weekly losses.

Commodities 23rd Sep 30th Sep % Change
Gold/10 gms 31,281 30,742 -1.72%
Silver/kg 46,817 45,726 -2.33%
Crude Oil/barrel 2,978 3,212 7.86%
Natural Gas/mmBtu 201.00 194.00 -3.48%
Currencies 23rd Sep 30th Sep % Change
INR / USD 66.99 66.87 0.18%
INR / EUR 75.23 74.79 0.58%
INR / GBP 86.98 86.86 0.14%
INR / JPY 66.49 66.12 0.56%

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