Better-than-expected Chinese manufacturing PMI boosted risk sentiment in Asia and drove Asian stocks higher. Shanghai Composite gained 0.42%, as Nikkei (+1.12%) and ASX 200 (+1.10%) outperformed on the back of a softer Japanese yen and firmer iron ore (+5.21%) prices respectively.
The FTSE 100 closed Wednesday’s session 0.17% higher. Although the technology sector (-1.48%), utilities (-1.11%) and mining stocks (-1.48%) suffered decent losses, energy stocks (+2.00%) lead the UK’s index higher.
Royal Dutch Shell (NYSE:RDSa) (Wednesday close: +4.28%, today’s open +2.40%) and BP PLC (NYSE:BP) (Wednesday close: +3.82%, today’s open +2.82%) were the biggest gainers after OPEC countries agreed to cut production for the first time since 2008.
Filtering the knee-jerk reaction, we have doubts about the mid-term potential in the oil recovery.
How sustainable is the OPEC-based rally?
In an effort to reverse the negative trend in oil prices, the world’s leading oil producer Saudi Arabia accepted to take on the big hit, by agreeing to decrease its output by 0.5 million barrels per day. Iran and Russia also said they would give their support.
The combined cut in oil production will certainly decrease the global oil glut.
Nevertheless, a supply-induced recovery will face several major issues.
Firstly, the oil recovery will certainly hit the barrier of a low global demand before it reaches the $55 level.
Secondly, the higher prices will inevitably bring in new international players. Many oil businesses are on hold because of cheap oil prices. As the prices go up, these businesses will gradually reach their breakeven and they will certainly reap the benefit of the recovering prices to join the global production.
Thirdly, US shale oil production is expected to increase under the Trump rule, regardless of the global glut and the price of a barrel.
Therefore, mid-term traders will continue seeking opportunities to sell the supply-induced rallies, until they are convinced of a credible and sustainable pick-up on the demand side.
Glencore (LON:GLEN) rallies on dividend announcement
Glencore (+3.29%) outperformed the UK’s mining sector (+0.59%) at the London open, after announcing to reinstate its dividend payment and to pay $1 billion dollars in dividends next year. Over the past year, the company’s stock price has almost tripled on the back of a rebound in commodity prices and its balance sheet consolidation.
Glencore sold $4.7 billion worth of assets this year, in line with its $4 to $5 billion annual target. The company is also successfully following its debt reduction plan. By December, it would have reduced its debt to between $17.5 to $16.5 billion, from $30 billion at the time of announcement.