Pressure in the markets is mounting. This time the Organisation of Petroleum Exporting Countries and its allies, knows as OPEC+, has fluttered and unexpectedly announced a significant production cuts of 1.157 million barrels per day starting in May and lasting throughout the end of 2023. Together with Russia’s self-imposed cuts, it will wave 1.657 million bpd from the market.
Crude prices jumped by 8% to $86.50 on Monday morning hitting a very important resistance level, which is the level at which crude prices could continue up to $94-96 per barrel. It is also a level that, once crossed, would signal to the change of the trend to the upside. However, prices later rolled back to $85 per barrel.
Alexander Novak, Russia’s energy minister, said that the banking crisis in the United States and Europe, economic uncertainty, and geopolitical tension are behind these cuts. In other words, OPEC+ sees that the market situation could be deteriorate rapidly and so it is acting ahead of possible market shocks. This sounds absurd as OPEC+ has never been seen to act in advance before. But in times when America’s global leadership is seen to be weakening, such actions have become possible. Nonetheless, such actions would largely depend on the response from the U.S. Administration as it has claimed that such actions by OPEC+ are “not advisable.” The Administration seemed to be waiting for a response while U.S. President, Joe Biden, had already threatened Saudi Arabia with “consequences” after the world’s largest oil producer announced a 2 million bpd cut by OPEC+ in October. But then the U.S. backed off and decided not to punish the Saudis. The current decision by OPEC+ is likely to lead to another interest rate hike by a Federal Reserve (Fed) in May amid surging crude prices. The Treasuries yield curve edged higher by 1.0-1.3% on this news. This is huge.
So, an intriguing combination is starting to emerge as high crude prices backed by OPEC+ are directly hitting the U.S. Administration, forcing it to response quickly. If it does not act, the market will think that the U.S. is losing this battle. Thus, the Fed may review the stock market drop as an option to drag fuel prices down together with high inflation.
This week investors will also monitor the American labour market as Non-Farm Payrolls data will be released on Friday. The unemployment level is extremely low, and this is an even bigger threat to the economy compared to rising crude prices. In this regard, the drop of the stock market by 30-40% is seen to be the only available option for the Fed in order to stabilise the economy.
Technically, the S&P 500 index will extend its formation to the upside with targets at 4150-4250 points. The upside possibility to move to 4160-4180 points may emerge in the middle of this week, but it is likely that the index will move laterally or to the downside towards 4075-4085 points.
Oil market traders have all eyes on the resistance of $86 per barrel of Brent crude. If this resistance level is crossed, the rise of crude prices to $9496 per barrel will be the primary scenario. If this is the case, the downside trend will be eliminated. If the resistance survives, the recession scenario will become the leading factor dragging down prices to $40-60 per barrel of the Brent crude benchmark.
Gold prices are moving inside the mid-term, upside formation with targets at $2000-2100 per troy ounce by the middle of 2023. Prices broke through the resistance level of $1890-1900 per ounce amid a shocking quake in the U.S. banking system and the widening fears of a possible banking crisis in Europe. They have reached the target zone. However, prices are likely to tumble before they can resume climbing towards extreme targets at $2400-2500 per ounce.
The U.S. Dollar is expected to be supported in April by the emerging upside signals. Considering high volatility in the market, it is better to place orders attached to longer perspectives. Short trades for EURUSD opened at 1.06700-1.07200 with a downside target at 5000 points below the opening level and the same 5000 points for a stop-loss order should be considered attractive. The decline of the EURUSD to 1.05000-1.05500 could be used to close half of the trade. The other half should be continued until the targets of 1.03000-1.03500 are met.
Besides, short positions for AUDUSD from 0.66900-0.67400 with the target of 3500 points and the same stop-loss order could be considered interesting. Short positions for GBPUSD from 1.23300-1.23800 with the target of 5000 points and the same 5000 points for a stop-loss order could be considered. Rising risks and market volatility could prompt trade volumes to be reduced.