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Oil decouples from equities

Published Friday, July 1st, 2016

London’s FTSE 100 led a third consecutive day of gains across global stock markets as it ventured further above its pre-referendum level to a 10-month high following hints by Mark Carney of further central bank largesse. The governor of the BoE laid out a clear plan in an effort to bring some order to the post-Brexit fallout and all but guaranteed additional stimulus measures over the coming months. In admitting that the UK economic outlook had worsened in the aftermath of last week’s shock vote, he signalled that interest rates would be cut from already record low levels and an expansion in its asset-buying programme. The prospect of an extra dosage of liquidity dampened the pound and sent yields on short-dated Gilts into negative territory for the first time but went a long way to soothe market concerns.

As the BoE provided some much needed guidance to market participants, lawmakers in Westminster did their best to undermine the relative sense of calm as the UK political fiasco rattled on. The entries are in for the race to become the next British Prime Minister and commentators were left stunned when Boris Johnson, the major driving force behind the Leave campaign, announced that he would not run. Rumours are rife as to what brought about this sudden change of heart with all the fingers pointing to what was a crafty piece of political manoeuvring by his one-time ally and fellow Leave campaigner, Michael Gove.

Ultimately, the lingering political uncertainty in the UK failed to dent the positive mood with equities across the eurozone receiving a much needed boost from news that the bloc edged out of deflation in June. The upbeat tone was tracked on Wall St with gains of more than 1% as a gauge of manufacturing activity in the US Midwest rebounded into expansion territory last month.

One notable omission from the move higher was the oil complex which pared back some of Wednesday’s solid gains as Brent crude suffered yet another short-lived spell above the $50/bbl mark. The European oil benchmark fell $1.61/bbl (49.71) and was joined lower by WTI which lost $1.55/bbl (48.33). Moves across oil products were similarly downbeat with Heating Oil down 576 points and RBOB slipping 370 points. Several factors were behind the waning price support including a bout of profit-taking ahead of the US long weekend and the start of talks aimed at averting an oil workers’ strike in Norway that risks curbing 12% of the country’s total oil and gas output. Warnings from Goldman Sachs that normalising Nigerian oil output will undermine its current 2H 2016 oil price target of $50/bbl also weighed on sentiment. The final blow for bulls came courtesy of an OPEC oil output survey from Reuters pointing to a 250,000 bpd increase in June to 32.82 mbpd which was led by – you guessed it – Nigeria.

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Posted by Stephen Brennock

Stephen Brennock joined PVM in 2013 after having worked as a project manager for a business development firm. He graduated with a degree in Business Management in 2007.