Swissquote: Oil & the planet

August 10, 2021

By Ipek Ozkardeskaya, Senior Analyst, Swissquote

We don’t need the UN’s panel to tell us that our planet is struggling with the climate change, it’s enough to watch the evening news to see that Turkey and Greece are fighting against the worst forest fires in their history due to extreme high temperatures, while Western Europe is inundated, with lakes overflowing and entire villages being swamped by flash floods. Add to that last years’ wildfires in Australia, fires in California, and so.

So, yesterday’s UN report came just as a scientific confirmation that all these events have to do with our huge CO2 emissions, and that the planet will warm by 1.5 degrees Celsius within the next two decades and by 2 degrees Celsius within the 21^st century.  

What does it do with finance?  

Nothing too obvious or too alarming, for now. Energy stocks traded lower on Monday. BP and Royal Dutch Shell were down in London, and Exxon lost some 1.14% in New York and not necessarily due to the UN’s climate report but mainly due to the further retreat in oil prices, which pulled the barrel of US crude to $65 yesterday, before rebounding back to the $67 in Asia.  

The rise in Covid’s delta cases have been weighing on oil prices lately, as they weigh on global demand prospects – though not necessarily on the demand itself for now. But the latest weekly report from US inventories hinted at a surprise inventory build last week.

If we continue seeing the same positive trend in US oil inventories for the weeks ahead, it could further discourage oil investors to let the crude recover above the $70 per barrel mark. In the short-run, we could expect to see some consolidation near the current levels, $67, which also matches the 100-day moving average. Yet, in the absence of oil-booster news, we’ll probably see oil sliding towards the $60 mark, where stands the 200-day moving average.

Lower oil  prices could weigh on the energy stocks, which, normally, should benefit from economic recovery and the so-called reflation trade, but the positive trend could be slowed by potentially lower oil prices and perhaps – by the planet concerns? 

The US indices had a flat session on Monday. Nasdaq eked out small gains.  

Activity in FTSE futures (-0.18%) hints at a sluggish open in London, as softer oil and commodity prices should continue weighing on energy and mining-heavy FTSE, although the selling pressure should be somewhat compensated by the softening British pound amid a globally stronger US dollar. 

Investors are holding their breath before tomorrow’s US inflation data. There is a chance we see a stronger-than-expected easing in the July inflation numbers in the US, as we saw close to 20% retreat in oil prices during the same month. But even with softer inflation data, the progress in consumer prices will remain high compared to historical averages, and the Federal Reserve’s (Fed) average 2% target.  

And the Fed is anyway walking with solid steps towards policy normalization. Raphael Bostic, who has an FOMC vote this year, said he wants to see bond tapering start by September and Eric Rosengren said he wants to see bond purchases dialed back by ‘this fall’. And it’s not a bad idea with Biden’s extra stimulus package waiting to be approved by the policymakers, and which would add fuel to the fire in the coming months.  

The US 10-year yield steadies a touch above the 1.30% mark, with prospects of further upside. That’s applying a positive pressure on the US dollar, and a negative pressure on the EURUSD, which is now down to 1.1730, approaching the next natural bearish target of 1.17.  

Finally, gold consolidates near the $1730 per ounce after the post-NFP flash crash, and should remain under the pressure of higher US yields into tomorrow’s US inflation report.