OPEC agrees to cut output as Russia increases
The Organisation of Petroleum Exporting Countries (OPEC) agreed in principle to a cut in output on Wednesday. The agreement was for a potential cut in production of between 240,000 to 740,000 barrels per day. The news sent oil prices rising towards $50/barrel once again, as this goes some way towards balancing supply and demand going forward. However, there remain concerns over whether the agreement will translate into a physical cut in production, given the highly politicised nature of the organisation and planned delay in the implementation of the policy. This all happened while Russia boosted production to a post-Soviet record. It is likely that the target price for OPEC will be between $60-70/barrel, enough to provide sufficient earnings but low enough to keep the majority of US shale production at bay. However, with the cost of extraction continuing to fall, even this may be too ambitious from OPEC.
More encouraging UK economic news came through last week. Revised figures for the second quarter showed growth at 0.7%, beating expectations. Furthermore, the UK service sector, which makes up two-thirds of the economy, grew at 0.4% from June to July. This was significantly higher than the 0.1% expected. The UK consumer remains robust after a slight setback in the week after the referendum vote. However, it remains likely that the Bank of England will cut interest rates once again, to just above 0%. The impact of such a cut in interest rates is heavily debated; however, it has become the default reaction of central banks when faced with economic risks.
There was turmoil in the European banking sector, as speculation around a potential bailout for Deutsche Bank grew. Senior members of Deutsche Bank and the German government were forced to make statements confirming that there was no need for a government bailout or a capital raising for the bank. Deutsche Bank’s share price reached a historical low, although regained much of the lost ground towards the end of the week. It is surprising that it is a German bank under pressure rather than a peripheral European bank. The speculation has cast a wide shadow over the global banking system, affecting almost all major bank shares. After imposing harsh rules on government banking bailouts onto other European countries, the German authorities would find it difficult to implement a rescue package if it turned out that it was required.
|UK 10 Year Gilt Yield||0.694||0.737||0.043||6.20%|
UK manufacturing data will be released on Friday along with US non-farm payrolls and the US unemployment rate.