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17/07/18 Market notes

OPEC hits spare capacity limits, US budget deficit growth accelerates

OPEC hits spare capacity limits, US budget deficit growth accelerates

 

According to an estimate of the EIA released last week Saudi Arabia will have to use all of its spare production capacity to make up for the drop in oil exports from sanctioned Iran and financially troubled Venezuela. The data shows that OPEC spare capacity equals to the Saudi Arabia’s meaning it’s the only member in the cartel which can substantially raise production.

However prices started the week with a severe drop, pricing in the news that US may deploy its strategic reserves to correct market prices if OPEC won’t take action on request from the US. 

IEA released a report this week which stated that, the Kingdom could expand production additionally up to 2 million barrels in May. In June, it fell to 1.58 million, and in July it was already up to only 1 million barrels.

 

Saudi Arabia spare output capacity

Saudi Arabia spare capacity heads to the lower bound. Source IEA, Bloomberg

 

What this data says is that Saudi Arabia hiked its oil output by about 500 thousand b/d in May. Over the summer months, the output of the kingdom rose by 0.9-1 million barrels.

According to the US Department of Energy, in June, OPEC’s ability to raise oil production fell to 1.54 million barrels per day, which corresponds to capacity reserves of Saudi Arabia. That is, the only country capable of materially increasing production is the Middle Eastern kingdom.

At the same time, in 2016, when the world oil market was hit by extreme oversupply, OPEC spare capacity averaged 1 million barrels. It is possible that production of the cartel will be difficult to fall below this level.

 

OPEC spare capacity

OPEC spare capacity is equal of the Saudi Arabia’s

 

Spare capacity is used like a safety cushion as it allows to absorb supply shocks and maintain production at safe level to meet it with demand. Flurry outages from Iran, Libya, Venezuela and Canada create dangerous situation where the oil shortages may not pass unnoticed and cause sharp price spikes as reserve capacity of OPEC and Russia is reaching lower existing bound. 

Taking into account historical data, won’t likely to add more than 500K barrels additionally to its production but the market glut may loom on the horizon, because US producers don’t sleep as well and keep output at record peaks. Recall that according to OPEC estimates, global demand will reach 99.4 only million barrels per day in the third quarter of 2018, while projected total world supply – 99.2 million barrels. In other words oil market will probably need to find additional supply to return to equilibrium.

So even with increase of output by 1M barrels in June to 11M barrels, Saudi Arabia probably failed to cover the deficit of crude oil and the fears of oversupply could be overstated.

 

No worries about the debt…yet

 

Since the beginning of the fiscal year, the US budget deficit has risen to $607 billion.

In the first nine months of 2018 (fiscal year in the US started in October 2017), the budget deficit exceeded $607 billion, which is 16% more than in the same period of last year.

In 2017, expenses exceeded revenues by $665.8 billion, $ 58.7 billion higher than the current amount for only 9 months from 12.

 

Budget deficit US by year

US budget deficit by year. Source: Treasury.gov

For the first nine months of this year, the budget received 2.5 trillion dollars, and spent 3.1 trillion dollars. Against this background, the US national debt reached 21.2 trillion dollars.

By the way, the growth of public debt is far from the fastest in the last ten years. For example, in 2009, due to the economic crisis, the budget deficit exceeded $1.4 trillion. And for four consecutive years it was more than 1 trillion.

Despite the fact that the US debt is already more than 21 trillion dollars, at the current interest rates, the United States creditworthiness is not particularly at risk. It is enough for the United States that the world economy grow at a moderate pace what ensures low interest rates and the dollar remains major reserve currency. That also ensures stable demand from the world to US debt securities which credit risk remains at 0 level. 

Each year the United States sells Treasuries worth $600-700 billion through auctions, and for the entire global economy this is not pretty much. The US will be in danger when the cost of debt servicing will surge. Today it is about 400-450 billion dollars a year.

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12/07/18 Market notes

Saudi Arabia June Output Hike Misunderstood?

Saudi Arabia June Output Hike Misunderstood?

 

“Embarrassed” oil market due to Saudi Arabia June output hike. But why?

 

Crude oil output from OPEC in the past months increased by 173 thousand b/d. Saudi Arabia added the most in joint cartel’s production.

Saudi Arabia June output hike averaged 405 thousand barrels a day. This was quite unexpected information for the market and prices posted biggest intraday decline for several months (-4% for Brent on July 11). This was truly a market crash. Continue reading

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11/07/18 Market notes

US corporate bond market structure indicates rising risks

US corporate bond market structure indicates rising risks

The US corporate debt market is rapidly losing its quality.

 

Deterioration in credit rating – a signal of the uncertainties of the times ahead for US firms?

According to Morgan Stanley estimates, the volume of bonds issued with investment grade “BBB” exceeded 2.56 trillion dollars, which is 10 billion dollars more than the amount of debt securities with the highest credit rating.  Continue reading

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10/07/18 Market notes

Investor Movement Index rebounds, correction fears ebb

Investor Movement Index rebounds, correction fears ebb

A sigh of relief on retail side?

 

Retail investors resumed cautious buying of US equity in June despite trade war fears.

Last month, the Investor Movement Index (IMX) rose to 5.45 points maintaining growth for a second month in a row. Prior to that, the Index was down for four consecutive months. Continue reading

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09/07/18 Market notes

What bond yield curve tells us about stock market rally?

What bond yield curve tells us about stock market rally?

 

What’s happening with the bond yield curve today?

 

US structure of interest rates continues to flatten out, i.e. the difference between the interest rates on Treasuries of longer and shorter maturity has been decreasing steadily towards zero, what fuels rumors about the fragile growth of US economy we witness today.

At the end of last week, the difference between yields on 30 and 10-year US government bonds has dropped to 0.11 basis points – a record low which hasn’t been seen from during the height of 2007 mortgage crisis. Continue reading

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28/06/18 Market notes

Credit spreads in US and some thoughts on 200-day average

Credit spreads in US and some thoughts on 200-day average

The spread between US investment-grade debt securities rose to a 16-month high.

As a result of Friday, spreads between the yields of investment-grade bonds reached 1.22 percentage points, which is the highest level since the beginning of 2017. Continue reading

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13/06/18 Forex education

How does carry trade work – in-depth tutorial for beginners

How does carry trade work – in-depth tutorial for beginners

What is the carry trade strategy and how does it work? Some subscribers to my blog are interested in carry trade strategy tutorial and unlikely to be fully aware of the difficulties in its use. The devil in details as we know, and it concerns any attempts to extract profit from the market. In this article, we’ll talk about what carry trade strategy consists of, when it brings profits and when it leads to disastrous results for a trader.
Continue reading

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29/04/18 Market notes

Market overview – Oil, CFTC data and US stock market

Market overview – Oil, CFTC data and US stock market

United States will probably outpace all its rivals on the oil market in terms of export growth next year, forecasts Citigroup.

 

Amid robust output increase in the United States to unprecedented levels and considering production caps imposed inside OPEC members, the US will probably become the world’s largest exporter of black gold, Citigroup believes.

According to the US Department of Energy, last week US oil exports rose to the new record highs of 8.3 million barrels per day. At the same time Saudi Arabia has been exporting 9.3 million barrels and Russia 7.4 million barrels, calculated in the bank. Continue reading

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12/04/18 Market notes

Net long oil position continues to decline – bearish sign for oil?

Net long oil position continues to decline – bearish sign for oil?

Hedge funds keeps scaling back wagers on oil growth after a two-week break. Swap dealers do not lag behind.

 

Hedge fund portfolios had 461,8 thousands long contracts and 37,6 thousands short contracts in the week ending in April 4. So the total net long position for crude shrunk to 424.3 thousand contracts, which is 43.8 thousand contracts less than a week earlier. The gap between the record volumes set at the end of January rose to 71.9 thousand contracts.  Commodity swap activity from the swap dealers accounted for the respective cut of hedge funds longs Continue reading

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01/04/18 Market notes

Smart money flow indicator – technical implication

Smart money flow indicator – technical implication

Before we start talking about dollar, stocks and Smart money flow indicator I would like to share with you a quick set-up for AUDUSD before RBA cash rate decision on Tuesday.

The reason to be bullish on AUDUSD is a lag of RBA policy comparing to its counterparts like ECB or Federal Reserves, what may cause money outflow from the Australia what is not good. The policymakers in Australia will be possibly forced to support AUD with hawkish comments after a long dovish period. Continue reading

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21/03/18 Market notes

10YR-2YR Treasury spread – what it means for the market?

BTCUSD forecast

Today we start from fast BTCUSD forecast and its entry point levels:

 

Bitcoin-levels
 

Why we consider BTCUSD bullish? It’s the result of G20 meeting where world financial leaders decided to loose grip on cryptocurrencies and after period of drawdown and then purgatory phase large investors may consider adding more crypto in their portfolio. Also crypto market proved to be resilient to FUD and complete market collapse, holding levels quite above of the last year. Continue reading

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13/03/18 Market notes

The echo of ECB stimulus

The echo of ECB stimulus

EURUSD has been long staying in the range 1.21-1.25 throughout this year but firm expectations on ECB tightening points to gaining strength for further upside movement.

The currency pair driven to multi-year lows on massive ECB stimulus measures turned to consolidation at the start of 2017 and later moved to growth on signals of policy tightening. Since then, the buck erased almost 20% against european currency. It would seem that such movements are more typical for Continue reading

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14/02/18 Market notes

Oil market review: Why prices should fall further?

Oil market review: Why prices should fall further?

Trump’s tax reform will not only leave marked footprint on corporate profits but also pose a big threat to the oil market.

Recall that in December last year, Donald Trump and Republican party successfully pushed the bill featured with massive tax cuts. Its too early to say what will be the precise impact on corporate earnings and social welfare. But the distinguishing thing is that sharp increase in oil production followed the Republican’s victory. The output boost can be attributed to mere coincidence but for oil traders it was completely unexpected outcome. Continue reading

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03/02/18 Market notes

Oil market review: Saudi Arabia exports and technical picture

Oil market review: Saudi Arabia exports and technical picture

Saudi Arabia Oil supplies

After a short break Saudi Arabia continued to increase oil exports from the country.

According to JODI, the Middle East Kingdom supplied to the world market more than 7 million barrels per day in November, marking the growth of export for two consequent months. Continue reading

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25/01/18 Market notes

Narrowing debt spread and boom and bust cycles

Narrowing debt spread and boom and bust cycles

Oil speculations helped US oil firms to cover 10% of drilling costs

The collapse of oil market started in the middle of 2014 and turned to recovery in the beginning of 2016 year when priced finally returned to upward trajectory. For this time United States managed to accumulate reserves and sell them in profit later.

Active stage of amassing crude reserves started in October 2014 and continued till the end of March 2017. Enjoying underpricing United States bought 211.2M barrels with average price of $50 per barrel. About $10.6 billion were spent for buying cheap oil. Continue reading

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19/01/18 Market notes

Oil market review: oversupply may turn to deficit

Oil market review: oversupply may turn to deficit

The oil market has been facing a deficit of crude oil for the third quarter in a row, OPEC reported in its monthly review on Thursday.

According to the organization research, the demand for black gold outpaced supply by 0.9 million barrels per day in the fourth quarter of 2017. According to the cartel’s forecast, world oil consumption in the first quarter of this year will amount to 97.2 million barrels per day. Decrease in demand compared to the fourth quarter of 2017 may result in a supply glut. For example, if the volume of production in OPEC does not change Continue reading

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11/01/18 Market notes

Swap dealers NYMEX keep oil market in touch and go state

Swap dealers NYMEX keep oil market in touch and go state

Hedge funds on the West staged profit taking move before the New Year and opted to start from a scratch the positioning in the new year. But Swap dealers NYMEX keep holding enormously high number of short positions, expecting major drawdown.

As of January 2, the volume of long positions in commercials decreased by 17.4 thousand contracts to 436.1 thousands. The amount of open short positions remained practically unchanged and at the start of the year was about 39.7 thousand contracts. Net “long” for crude oil, in turn, dropped to 396.4 thousands, but it is still above the average of the last three years by 186 thousand contracts, or almost twice. Continue reading

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19/12/17 Market notes

Cash inflow in biggest US ETF signals calm among retail investors

Cash inflow in biggest US ETF signals calm among retail investors

Cash inflow in biggest US ETF November

Recently unqualified investors have been heavily taking long positions on US stocks with unprecedented rush, reported Ameritrade brokerhouse, which has a client base of 6M traders.

The dynamics of biggest ETF fund in the US – ETF SPY, which mirrors movement of S&P 500 index shows that the cash outflow turned to abrupt cash inflow signaling growing calm among investors. From the start of 2017 to 20 of November the outflow amounted to 14.3B dollars, but a month later investors poured back 16.8B dollars, pulling the fund’s size curve into positive area. A similar trend occurred during the peak of «Trumpenomics» euphoria in March which then gave place to market anxiety and expectations of stock market retracement.

Continue reading

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04/12/17 Market notes

OPEC agrees to prolong cuts, markets unsure about effect

OPEC agrees to prolong cuts, markets unsure about effect

Mixed sentiments

Hedge funds continue to step up with bullish pressure on oil. Before the meeting of OPEC + in Vienna, their short positions on black gold came close to the lowest levels ​​of last three years.

By November 28, hedge fund portfolios had 436,600 long and 40,1 thousand short positions. For a week, their longs increased by 26.8 thousand contracts, while short decreased by 25.9 thousand. Thus, the net long position on oil rose to 396.5 thousand contracts. Thus, only 17.2 thousand contracts are missing to the record.

Continue reading

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