Oil falls over 5% on possible US reserves release

European bourses are heading for a moderately stronger start after a mixed close yesterday and weakness in Asia overnight.

• Chinese manufacturing & service PMI fell into contraction in March
• Oil falls as the US considers a huge release of strategic reserves ahead of the OPEC meeting
• UK Q4 GDP was upwardly revised, US inflation is expected to keep rising, GBP/USD is off session lows

Shares in China and Hong Kong came under pressure after Chinese data showed that activity in the manufacturing and service sector contracted, together, for the first time since the height of the pandemic in 2020. The official manufacturing PMI fell to 49.5 from 50.2 in February, while the services PMI fell to 48.4 from 51.6. The level 50 separates expansion from contraction. The simultaneous slowdown comes as COVID cases rise in China, and authorities again impose lockdown restrictions.

The Aussie, which is known as a China proxy, trades lower following the data. AUD/USD is falling, snapping a two-day winning run. News that Australia is imposing tariffs on all Russian imports is also hurting demand for the risk-sensitive Aussie.

European bourses are being helped higher by the news that peace talks, which had stalled yesterday, will resume tomorrow online. The fact that the two sides are still talking brings at least some optimism to the markets. Falling oil prices are also helping to lift sentiment.

Oil

Oil prices are falling over 5%, heading towards the European open as President Biden considers a massive release of strategic reserves. The US is weighing up a release of 180 million barrels from its strategic reserves (SPR) over several months to calm surging oil prices. The President is expected to remark on the plans later today, the same day that the OPEC+ group is expected to keep production plans unchanged.

OPEC+ are already failing to match the current quota for oil output, so even if they did upwardly revise the already planned 400,000 bpd increase, there is a good chance they wouldn’t reach the new quota anyway. That aside, the group, which includes Russia, doesn’t consider an oil supply issue but a geopolitical issue affecting the price and which they will not resolve. 

Falling oil prices are weighing on the oil majors listed on the FTSE, which is set to underperform its European peers on the open, despite the encouraging GDP data.

UK GDP

Data revealed that the UK economy grew 1.3% QoQ in the final three months of last year, up from the earlier estimate of 1%. Whilst this is encouraging and helped the pound off session lows, the outlook for economic growth this year is less promising in light of surging inflation.

US inflation

Attention will shift to the US data drop later today, including jobless claims, which fell to the lowest level since 1969 last week, and core personal consumption expenditure inflation data (PCE), the Fed’s preferred gauge for inflation. Expectations are for Core PCE to rise to 5.5% YoY in February, up from 5.2% in January. This data still won’t reflect the rise in prices following the Russian invasion. The Fed has become more hawkish this month, with the CME Fed Funds pricing in a 66% probability of a 50 basis point rate hike in May.

The USD is holding steady today after falling over 1.1% across the past two sessions. GBP/USD has picked up off session lows and trades around 1.3130.