OPEC's Production Cut - 1.5M bpd- Disappointed The Market

OPEC announced to reduce oil production by 1.5M bpd from November in light of recent drastic fall in oil prices. It's very possible that there will be another cut in December. Oil price tumbled to as low as 63.05 after the news. Currently trading at 64.83, the black gold has fallen by 56% from the peak at 147.27 in March. Outlook remains bearish and further downsides to $60 and then $50 looks inevitable.

There are several reasons for the negative response to the production cut. First, sluggish economic growth has spread from OECDs to developing countries. After China reported lower-than-expected GDP growth of 9% for the third quarter, Korea, today reported 3.9% YoY growth on economy, the weakest pace in 3 years. Second, OPEC as cartel of major oil producing countries failed to agree on whether a cut will be executed. Although the cut was 1.5M bbls, Iran believed at least 2M bpd is meaningful while Saudi Arabia denied the need for any cut and insisted price should be determined but the market. Third, as we mentioned the previous day, production cut reinforced the weak demand situation we are facing which is negative for oil price.

Both Asian and European stocks market plunged Friday. MSCI AP Index fell 5.6% to 80.44, set for its seventh weekly decline in the past 8 weeks. MSCI's Asian index is down 8% this week and has plummeted 49% this year, its worst annual performance since the measure was created in 1980. In European morning, all stock indices dropped. FTSE fell 7.37%, CAC dropped 8.23% and DAX dropped 9.01%. Investors worried that weak economic growth is eating into corporations' earnings.

We have lowered the trading range of gold aggressively from above $822.5/bbl last month to below 739.8. After 700 was broken, gold for December delivery extended the weakness today. In short term, the precious metal remained weak and the next downside is 600. Gold is heading for its second weekly decline and has been down by more than 10% this week so far.

USD's strength against major currencies except yen is certainly a reason, slowdown in physical buying via ETFs also caused the decline. Investment in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, has stalled after reaching a record 770.6 tons on Oct. 10. Holdings fell to 747.1 million tons.

The dollar rose to $1.2547 against the Euro after worse than expected manufacturing and GDP data were released in the Eurozone and the UK, respectively, indicating economic deterioration. PMI Manufacturing Index for October came in at 41.3, lower than consensus of 44.0 and September's 45.0. In the UK, GDP in Q3 shrank by 0.5% from the last quarter, worse than an expected fall of 0.2%. On a yearly basis, economic growth was 0.3% in the third quarter. On the other hand, yen rallied to 13-year high against USD as investors became risk-averse and moved away from high-yield assets.