Russia refuses further OPEC cuts

Oil has staged a solid recovery rally off $42 lows. The move to $47 was fueled by diplomatic tensions between Qatar and Saudi-led allies and expectations that OPEC would challenge the soft price with further productions limits.

While prices have marginally recovered, crude remains in bear market as surging supply has easily offset production cuts from OPEC and its partners (rate of demand inadequate).

In a hit to the crude bullish momentum, Russia announced overnight that they would not support further OPEC production reduction. It has been reported that Russian government officials will oppose further oil supply cuts, indicating the strategy would send the wrong message to the market. We agree that more cuts could trigger panic selling and highlight cracks in OPEC members failure to stick to the agreement.

Russia’s onshore oil production costs stand at $18 meaning a risk of further price deprecations would start heading worryingly close for a crude dependent economy to break-even. Without the threat of Russia, additional production cuts feel unlikely. The summer-induced crude stockpile declines are likely to reverse in August as the key US driving period ends. As stockpiles replenish and the effect of OPEC supply cuts fade, crude prices should decline back towards $42.

We would remain short oil linked FX currencies such CAD, NOK, MXN. While in the short-term, sensitively to crude prices have lessened to monetary policy expectations, in the mid-term weaker oil prices will have a negative impulse for inflation and growth.

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