Sasfin: Forex Daily Market – Oil markets fall after hitting 7-year high

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Today’s talking point

Oil update:

To analyse: Oil markets fell overnight after hitting seven-year highs. New York futures fell more than 3% at the time of writing, while Brent’s first-month contract fell from above $89.50 a barrel to near $86.60. This was driven by a broad sell-off in equities and commodities, while the first gain in US stocks in eight weeks added to bearish sentiment. Given the recent rally, however, it’s no surprise to see some form of pullback in the market, with fundamentals unchanged and still very bullish for oil over the coming weeks and months. The IEA noted yesterday that demand was stronger than expected, which kept the market structurally tight. This has boosted oil price forecasts for the year ahead at most major institutions, with Morgan Stanly now adding to the chorus of those predicting $100 oil. Such price levels may be possible temporarily, but they will not be sustained for a significant period of time given that there is room for more production from US shale producers, while demand levels do not are not far from their peaks according to us. Therefore, we can expect a short-term jump from this recent correction and profit taking.

Rand Update

Overall, the week was good for ZAR. While he started the week on the defensive, he turned around and gained popularity through trades on Wednesday and Thursday. The catalyst was domestic inflation data which strengthened the case for monetary tightening, and while inflation may be peaking, it looks like containing inflation will take more effort, and inflation expectations could turn out to be more dynamic than initially expected.

As we wind down the week, there isn’t much data to focus on other than data from the US leading indicators, which are not traditionally moving in the market. Domestically, much attention will be on the SARB’s first decision of the year, which calls for another 25 basis point rate hike. Although the inflation data is stronger than expected, the SARB is unlikely to move more aggressively than that, given weakness in the underlying economy and continued weakness in the credit cycle, which will contribute to contain inflation in the future.

Let us not forget that this last episode of inflation did not cause the inflation rate to cross the upper limit of the inflation target range of 3 to 6%. There is no reason to panic as the rate hike cycle is underway. Internationally, there are also signs that the peak of inflation is near or at its peak and will also moderate over the course of 2022. The conclusion is that the SARB will continue to evolve gradually and take into account takes the latest data into account as it comes to terms with whether it has done enough to contain inflation or whether it needs to do more.

Bond Update

Strong oil prices remain a crucial inflation risk that the SARB will need to address at its meeting next week, with prices at current levels of $86.77/barrel well above the November assumptions of the bank for oil at $73/barrel on average in 2022. in ZAR, the price of oil is around R1,377/barrel, up 60% in annual terms, annual rate similar to December, although the nominal price of oil was a little below an average rate of 1,188 rand/barrel. This suggests that further increases in fuel prices could be expected.

Since the price of oil in ZAR determines about 50% of the local price of fuel (the rest being taxes and handling charges), the risk of inflation arises from rising prices of oil imports. Note that fuel prices represent approximately 4.6% of the CPI basket, while a month-long price adjustment period applies, the month’s input price over- or under-recovery previous being used to modify the fuel price. It follows that January and February, at the very least, will see relatively high fuel prices. This will feed the CPI measure to a weighting of 4.6%, suggesting that around 140 basis points of CPI inflation in January and February will be fuel related.

While still high and likely to eat away at ZAR’s purchasing power, it’s also worth noting that this would represent a reduced rate of inflation compared to December’s CPI print, which saw a impact of more than 200 basis points on the CPI basket. A closer look at the oil market suggests that this upward pressure is unlikely to last, with oil prices for 1-year delivery offering a steep discount to spot prices for immediate delivery of around 9% through January. until now. In traditional market theory, this suggests that the market is currently in a tight supply scenario that is not likely to last.

Data released during the US session showed a rising oil inventory environment in the US, which dulled the bullish rally in oil. However, market participants remain concerned about the possibility of continued upward pressure on oil prices. Morgan Stanley recently released research claiming oil at $100 a barrel could be seen in the coming months as supplies struggle to meet demand.

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