The Doha meeting a suffered dramatic setback yesterday, due to Iran's last-minute withdrawal.
The talk failed to achieve even a ‘soft’ agreement on a production freeze among oil-producing countries. Despite this, market still expects that an agreement will be reached at June's OPEC meeting. WTI crude oil futures traded 6% lower during Asian hours this morning after falling 2.4% last Friday.
This is a typical ‘Prisoner's Dilemma’ - the optimal outcome is achieved if all prisoners keep silent, i.e. all members agree to freeze production, thus oil price will rise. In reality, however, prisoners can get a higher reward by betraying each other, that is in increasing production when others are cutting.
Therefore, some prisoners will choose to betray (Iran, for example) and other prisoners will hesitate about keeping silent (Saudi Arabia). Ultimately, an agreement cannot be achieved, and the optimal outcome is never achieved.
USD/CAD rose nearly 1% to 1.2966 this morning due to lower crude prices.
AUD/USD reached its nine-month high of 0.7715 last Friday due to better-than-expected Chinese trade balance and industrial production data released last week. It has retraced back to the 0.7655 area this morning. USD/JPY has pulled back to 108.05 after it hit a weekly high of 109.73, as risk-averse sentiment drives demand for safe-haven currencies. USD/SGD also pulled back to the 1.3607 area.
Equity markets registered a positive weekly return last week, with European and Asian markets advancing 3-4% on average. Investors should be cautious this week as the market is now facing headwinds from the collapse in oil prices and the ripple effect on commodity counters.
Crude Oil West Texas May 2016
Key technical levels to watch:
- Double head formed with the top at 41.50-42.00 area
- Immediate resistance level : 41.69
- Immediate support levels: 37.20, followed by 35.25
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