Wednesday, November 30, 2016

OPEC: white smoke in Vienna

Finally, OPEC countries reached an agreement.

And finally, at noon, after days of various declarations and rumors, the complicated member countries of OPEC reached an agreement. What yesterday seemed very difficult to achieve due to the stubborn demands of Iran and Iraq in terms of their production cuts, which yesterday made the oil fall almost 5%, was achieved today in Vienna with happy faces everywhere ... at least for the picture.

Today its future /CL closed at close to $49, its monthly maximum, after a strong increase of +8.5%, expecting this to end with its days of extreme volatility, understood as continuous changes of direction and speed in the price. The output cut agreed by the OPEC group was 1.2mbd (million barrels per day), close to 4.5% of its daily production, setting the total at 32.5mbd, significant to reduce the current excess supply of about 2 years. Some analysts estimate that the price will fluctuate in the $ 50-60 until mid-2017.

Saudi Arabia will be responsible for monitoring the compliance of member countries, it is known that these accustom not to meet the cuts, produce more than stipulated and create these crises of global overproduction. They must also supervise that the non-OPEC countries do not begin to increase their production, now on stand-by.

As traders, follow the Energy XLE sector, today +5%. All oil companies had increases of the order of 10% on average. Another good move is to buy calls at the money from the etf of the crude USO that may have annual maximums within a few days.

Grafico ichimoku del crudo /CL en 2016: desde julio, la volatilidad lo hizo subir y bajar de la nube,
en rango lateral.  Se espera que con el acuerdo OPEP las tendencias se definan mejor.

Fine OPEC. So... Rate Hike in December ?

As a consequence of the oil agreement, an increase in inflation can be expected, justification expected by the FED to raise rates in December. As traders, there are many options: follow the dollar /DX that is strong, or in its absence short gold /GC. Another point where you can trade is treasure bonds /ZN and /ZB: it is known that inflation is your main enemy, so you have to observe the shape of the yield curve, to see if the inclination it has been given within the expected, and invest in the indicated, either short or long term. Incidentally both today had a strong rise helped by oil.

The notes to 10-years TNX today in 2.37% and those of 30-years TYX
in a strong 3.02%, after 3 days to the low.

The Recommended Reading

Mentioned in several Wall street news, the yield curve, takes important news to be near a new policy in the US and also a probable Rate Hike in December. Understanding this curve, its four types (normal-reverse-flat-humpback), its inclination (steep or flat) and its relationship with the market, will allow us to make better trades. Or its basic principles, such as the primary and direct influence of the yield on short-term bonds is the i-rate assigned by the FED, while the long-term ones depend, also directly, on inflation and how it is eroding the value of the bonus in time.

This didactic article by Felix Baruque in the blog 'Strategy of Investment' explains it colloquially, suggesting that it can happen in the immediate future. I strongly recommend your reading and careful analysis.

Understanding the rate curve is decisive to invest taking advantage of the inflation and i-rate data.