Not too Hot and Not too Cold, Not too High and Not too Low
When i have nothing important to blog about i'll be writing about random updates in the world of finance...like this one.
So today was pretty bullish for the markets in general. This was following yesterday's epic squeeze. It was magnificent, the Nikkei rocketing off 1,000+ points!
Major news headline of the day is that Saudi and Russia, among other producers, have agreed to freeze production output. (wait for it) At January levels.
Is this bullish news? Or bearish? The immediate market reaction was a steep flush downwards in crude prices. By now this shouldn't be surprising. This is about as surprising as the Japanese Yen strengthening after the Bank of Japan introduced negative interest rates. Or as surprising as the markets strengthening after releasing of weak economic data.
What is bearish about this news is, January outputs are probably at a very high level. Freezing outputs at such a high level now doesn't sound so good.
What is bullish however is the surprising fact that Saudi and Russia are able to craft an agreement while they are on the verge of open war in Syria.
Let's look at the motivation for this set of agreement. As exporter nations, both Saudi and Russia are practically bleeding their reserves trying to maintain their national budgets from the lower oil revenues. Low oil prices is definitely a not good thing for both parties to have.
On the other hand we shouldn't forget that they have a common enemy here, which is the US shale oil and gas industry. Oil prices that are too high are not acceptable as well, because US shale oil is more expensive to extract, and as good businessmen they would prefer more shale companies to close shop first.
Hence we could reasonably guess that what Saudi and Russia needs is for oil prices to be in the Goldilocks region. Not too low and not too high.
While attention grabbing headlines are intended to have an effect on prices, at least in the short term, whether Saudi and Russia freezes ACTUAL production is a different matter altogether.
Disclaimer: My personal views on oil: bullish in the short term, bearish in the long term. Since this is an oil article I have to disclose that I am long GUSH: Direxion Daily S&P500 Oil & Gas Bull 3x Shares ETF.
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