Danske Bank Strategy Research discusses its outlook for Oil and USD after the Organisation of Petroleum Exporting Countries (OPEC) decided today to extend the deal to cut oil production agreed last November for another nine months with effect from 1 July.

"Following the announcement, the price on Brent crude has dropped more than 5% to close USD51/bl. It is the largest daily drop since the selloff at the beginning of 2016. Hence, the oil market is disappointed that OPEC did not deliver more today, either in terms of deeper production cuts or a longer extension. Speculative positioning before the meeting was net long which has likely exacerbated the market reaction," Danske notes.

In our view, there is likely a degree of immediate overreaction in the oil market and we could see prices recover slightly in the coming days. That said, we maintain a neutral stance on the oil price near term and highlight important downside risks from a potentially more hawkish Federal Reserve, which is set to meet in June.

This could lead the USD higher (we forecast EUR/USD at 1.09 in 3M), a further deterioration of the recent financial stress in China and the global business cycle beginning to turn lower in the coming months. '

Medium term, we remain positive on the oil price and forecast the price on Brent crude to average USD60/bl in 2018 on the back of a lower USD and somewhat tighter oil market," Danske argues.

Source: Danske Bank ResearchOriginal Article