OPEC stands for the Organization of the Petroleum Exporting Countries. Founded in 1960, OPEC's main objective is to coordinate and unify the petroleum policies of its member countries to secure fair and stable prices for petroleum producers. This article briefly outlines who this organisation is and their significant influence on the pricing of oil.

Who are OPEC? OPEC has 13 member countries, including nations like Saudi Arabia, Iraq, Iran, and Venezuela, among others. OPEC holds 80.4% of the world’s proven oil reserves, while the set of 11 non-OPEC nations represent 9.7% of proven oil reserves.

With 90% of the world’s proven crude oil reserves held by these nations, they have the capability to disrupt or enhance the supply of crude oil. The list of non-OPEC nations includes Azerbaijan, Bahrain, Brunei, Equatorial Guinea, Kazakhstan, Russia, Mexico, Malaysia, South Sudan, Sudan and Oman. And OPEC+?

OPEC+ refers to OPEC and its alliance with other major oil-exporting countries that are not part of OPEC. OPEC+ aims to bring more coordination to global oil production levels, thereby stabilizing prices. The most notable non-OPEC country in OPEC+ is Russia, but the group also includes Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan and Sudan And what are the “Observer states”?

Observer states do not have voting rights in OPEC decisions but may be invited to participate in discussions, share perspectives, and sometimes even coordinate policies informally with OPEC members. The status of observer can serve as a preliminary step before becoming a full member, although this is not always the case. Observer state countries include Canada, Egypt, Norway and Oman.

What Does OPEC do? Production Quotas: Both OPEC and OPEC+ set production quotas for member countries to balance supply and demand in the global oil market. These quotas aim to stabilise or increase oil prices depending on prevailing market conditions and arguably to meet their needs as oil producing nations.

Market Monitoring: The organisations monitor global economic conditions, energy markets, and supply/demand factors to inform their decisions. Policy Coordination: Through regular meetings, OPEC and OPEC+ members coordinate their national policies regarding oil production. Data and Research: They gather and publish data on oil production, exporting, and pricing, providing valuable insights into the global oil market.

How Do They Do It? Regular Meetings: Both OPEC and OPEC+ hold regular meetings to review current market conditions and decide on production quotas. Technical Committees: These are specialized committees that analyze market conditions and recommend policies.

Joint Ministerial Monitoring Committee (JMMC): In the case of OPEC+, this committee reviews compliance with agreed production quotas and recommends corrective measures if needed. Consensus Decision-Making: Decisions, especially in OPEC, are generally made by unanimous agreement, although OPEC+ operates more on a negotiated basis between its leading members. Market Implications of OPEC Decision Making A knowledge of both the direct and wider indirect influence of OPEC on financial markets is worthwhile as this goes across the majority of asset classes, and therefore can influence traders significant irrespective of their preferred trading instrument.

These include: Oil Prices: OPEC and OPEC+ decisions hold significant sway over global oil prices. These organizations, representing a substantial portion of the world's oil production, can influence supply levels through production cuts or increases. Consequently, their actions often result in immediate and sometimes substantial effects on oil prices.

Higher production quotas tend to lower prices, while production cuts can drive prices upward. These price fluctuations impact both energy companies and consumers, as they affect fuel costs and energy-related expenses. Stock Markets: While energy stocks and indices are particularly sensitive to OPEC/OPEC+ decisions, the broader stock market is also affected.

This broader impact arises from the economic implications of oil price changes. For instance, rising oil prices can lead to increased production costs for many businesses, potentially impacting corporate profits. Conversely, lower oil prices can benefit various industries but may negatively affect energy sector companies.

Therefore, stock markets, as a whole, as well as individual stocks react to these shifts in energy prices, influencing investment strategies and market sentiment. Currency Markets: Changes in oil prices can have a cascading effect on currency markets. Oil-exporting countries e.g., Canada, often rely heavily on oil revenues to support their economies.

When oil prices rise, these countries tend to experience increased income, which can strengthen their currencies. Conversely, falling oil prices can weaken their currencies. This currency impact, in turn, affects Forex markets as traders adjust their positions based on shifts in exchange rates driven by oil price movements.

Inflation: Oil prices have a direct and immediate impact on inflation levels worldwide. This is because energy costs are a significant component of the Consumer Price Index (CPI) in many countries. When oil prices rise, it often leads to higher transportation and production costs, ultimately contributing to inflation.

Central banks closely monitor inflation levels, and significant changes can influence their monetary policies, including decisions on interest rates. Thus, OPEC's choices can indirectly affect central bank decisions, which, in turn, impact financial markets. Geopolitical Implications: The decisions made by OPEC and OPEC+ are not just economic; they also have geopolitical ramifications.

Oil is a strategic resource with far-reaching geopolitical significance. Countries that are major oil producers often wield considerable influence on the global stage due to their energy resources. Therefore, OPEC's decisions can sometimes lead to geopolitical tensions or alliances, affecting international relations and potentially impacting global security.

Sector Impact: Certain industries are highly dependent on oil prices. Airlines, transportation, and the automotive sector, for instance, are profoundly affected by OPEC/OPEC+ decisions. Airlines may experience changes in fuel costs, which can significantly impact their operational expenses and profitability.

Similarly, transportation companies and automakers rely on affordable fuel prices to maintain competitive pricing and consumer demand. Consequently, OPEC's choices can ripple through these sectors, influencing business strategies, stock performance, and investor sentiment. Summary Although by no means the only influence on the price of oil and related assets, OPEC undoubtedly plays a major part.

For traders, particularly those involved in commodity trading, energy sectors, or currencies of oil-dependent countries, understanding the dynamics of OPEC and OPEC+ is crucial. Their decisions can create volatility and trading opportunities, but also pose risks that need to be managed carefully. A knowledge of timing of OPEC meetings and observation of the impact of OPEC statements are a great start point in managing such risks and taking advantages of opportunities that may exist.

The word Populism is probably the buzzword at the World Economic Forum this year. The headlines this week were heavily dominated by the concerns of the rise of populism around the globe. “Brazil’s Bolsonaro is the Face of Populism at the Davos Forum” “Merkel encourages multilateralism in the face of populism…” “Chrystia Freelans decries the rise of populism…” “Is Davos listening? Populist wind blows over…” “Business leaders concerned about the rise of US nationalism, populism…” This year, three Western Leaders are not present, and the reason behind it is tilted towards the issue of populism.

This is actually a “ Strong Message ” for the financial markets. The United States is not in attendance due to the shutdown related to the funding of the Wall. President Trump is taking a hard line on immigration and trade.

The United Kingdom is trapped with Brexit. Theresa May abstained from the forum as Brexit uncertainties linger. The UK leaving the European Union is the notable example of the rise of populism based on the desire to regain control over immigration and national sovereignty.

France is being rattled by the “yellow vests” protests which initially begun because of the fuel tax hikes and mean well. However, as it lingers through more than two months, there are concerns that it has given rise to populist strategies in French Is Populism a headwind for Economic Growth and the Markets? The IMF recently flagged how policies need to be adjusted to face the slowing global growth amid rising risks and has called for multilateral cooperation to tackle protectionism and trade tensions.

The message echoed the fears of the rise in populism in the markets. The concept of populist parties and economic growth can be complexed as the effects need to be assessed on the short-term and long-term basis. Populist political parties sometimes come with a fiscal spending policy that stimulates the economy in the short-term, similar to the outperformance of the US economy.

The Trump administration has boosted growth, business and consumer confidence and reduced unemployment through various policies such as tax cuts. However, populist parties often come with protectionism measures and anti-immigration policy which is a hindrance for long-term economic growth. Domestic economies are not able to reap the benefits that normally come with globalization which means that trade restrictions and labour immobility can create a stagflationary environment.

The US is the example of how the US economy bolstered during the first two years of Trump’s presidency mostly driven by fiscal spending, but the growth is expecting to slow down due to the gridlock in Washington. Similarly, the spread in populist parties has prompted market angst in the European markets. European shares have been underperforming compared to the global markets.

The % change for a year shows that the fall in major European equities – Euro Stoxx 50, FTSE100, the Dax and the CAC 40 is deeper compared to the US or Australian equity benchmark. Source: Bloomberg The shared currency is also under pressure. A look at the graph below shows that since the beginning of the year, major currencies are in the green against the US dollar compared to the Euro.

A combination of weak data, domestic political challenges and a rise in populism are weighing heavily on the Eurozone outlook. Populism and Emerging Countries The list of headwinds that the Emerging markets have to deal with over the past year is long: US Rising rates and the Fed Trade tensions The rout in oil markets Populist parties Without any doubt, we saw EM crashing last year on the three main points listed above. Populism is another significant point to monitor.

Emerging economies are the ones who benefitted the most from globalization. Trade barriers can have a big impact, and EMs rely heavily on exports to developed countries. Populism is among the most significant risks to the financial markets which are increasing the risk of triggering a crisis.

What do we know about the state-owned oil giant - Saudi Aramco? World’s largest company World’s biggest state-owned oil and gas companies World’s cheapest oil producer A leader in oil production Second-largest proven crude oil reserves All of the above would probably make this upcoming Initial Public Offering (IPO) one of the most hyped IPOs of all time. In 86-year of history, Saudi Arabia has officially stated its plan to float the company on the Riyadh stock exchange.

After first being announced in 2016, the Saudi Aramco officially confirmed the IPO on November 3. However, the size and scope of the IPO were unknown so far. On Sunday, Saudi Arabia’s officials have officially launched the IPO and confirmed that the domestic listing will take place in December.

Vision 2030 The primary purpose of the IPO is to diversify Saudi’s economy and its reliance on the oil industry. After the fall in the oil prices in 2015, Crown Prince, Mohammed bin Salman’s introduced the Vision 2030 which encompasses the desire to reinforce and diversify the capabilities of Saudi’s economy. The Prince has designed its vision on three main pillars: Saudi Arabia’s status as the heart of the Arab and Islamic worlds.

Becoming a global investment powerhouse. Transforming the country’s strategic location into a global hub connecting Asia, Europe and Africa. Hence, transforming Aramco from an oil-producing company into a global industrial conglomerate is a key step in raising funds for the Vision 2030.

Lacklustre International Response Even though the national oil company do have a high degree of independence, the Crown Prince has taken a more active role in the company over the years. As the purpose of the IPO is to raise funds to follow the plans to diversify the economy, the money will not be going to the company, unlike standard IPOs It is, therefore. a distinct consideration for the Aramco investor Bankers were unable to convince many international money managers of the merits of the deal which prompted Aramco to keep the IPO local. Shares will not be marketed in the US, Canada and Japan as originally expected.

The Domestic IPO On Sunday, Aramco finally provided details on what could be the world’s biggest IPO. Currently, the Chinese online retail giant, Alibaba holds the record with an IPO of $25 billion. Valuation Aramco valued the company between the $1.6 trillion to $1.7 trillion which was below their Crown Prince’s valuation of $2 trillion.

The new valuation implies that the investors will yield a dividend lesser than those from other leading oil and gas companies. A Smaller Stake Aramco decided to sell only 1.5% of its company on Riyadh’s Tadawul exchange which amounts about half of the amount that had been considered at an indicative price range of 30 Saudi riyals ($8.00) to 32 Saudi riyals per share. At the top of the range, the company could raise as much as $25.60 billion beating Alibaba’s capital raise in 2014.

The IPO will be split into two tranches: 5% will go individual investors who will have until November 28 to sign up for the IPO 1% to institutional investors who will have until December 4 to subscribe. Despite the lower valuation, a smaller stake and an IPO limited to local investors, Saudi Aramco is confident that they will have sufficient Middle Eastern institutional investors and local demand for a successful IPO. Setbacks in the Oil Market Oil Demand Oil prices have slumped in the last few years and have more than halved since mid-2014 mainly because of: A glut in global supply A lacklustre demand The dramatic fall in prices has forced OPEC members to cut back production to help stabilise supply and cushion the fall in prices.

US shale producers, geopolitical risks, tensions in the Middle East, trade tensions, and slowing global growth are key factors affecting the supply and demand dynamics in the oil market. Oil and Gas Divestment – Climate Activism Another crucial factor that has caused a shift in the oil market is the growing movement towards climate change which are subsequently pushing investors away from the oil and gas sector. The industry has faced intense pressure from activists and we might see the pressure intensifying as such high-scale IPO will undermine their fight against the climate crisis.

Saudi Aramco is among the top carbon dioxide and methane emitters. Those concerns are forcing portfolio managers to divest from oil and gas companies to embrace more sustainable investment. Drone Attacks The crippling attacks have caused major damage to Saudi Aramco’s facilities in Abqaiq and Khurais.

Even though the company recovered quickly and resumed production, investors are taking note of the nation’s vulnerabilities to attacks. As of writing, it was also reported that Yemen’s Houthi rebels has seized Saudi ship carrying oil rig. At a time where Saudi Arabia wishes to diversify and entice foreign investors, keeping the IPO as a local affair has undermined the efforts to open its economy to the world.

The much-muted details of the IPO, setbacks in the oil markets and the gruesome killing of Jamal Khashoggi have trigger hesitations from international investors to buy Saudi Aramco at full price. Saudi Aramco is a leader in the industry and will probably be able to cope with the current challenges of the industry until the industry is faced with the situation of peak oil demand. Oil Prices and the IPO The upcoming IPO will be one of the key determinants of the immediate price action of oil.

The public offering and the OPEC meeting are intertwined and oil traders should monitor these events carefully. OPEC’s de facto leader is Saudi Arabia and it is reported that the Saudis are set to push OPEC countries to make deeper oil cuts to keep oil prices higher. On the trade front, even though there are some conflicting trade headlines, there is much optimism on the trade front to keep oil prices from falling to September lows.

All-in-all, those two main events provide some upward room for oil prices.

The Loonie Best Performing G10 Currencies After a tight campaign marred by scandals, Justin Trudeau secured another term as Prime Minister. Unlike a clear win in 2015, the Prime Minister did not pass the threshold of 170 seats and will lead a minority government. The governing party will be forced to depend on other parties to pass legislation.

The voting results show deep divisions in the country: The Liberals won in terms of seat numbers. The Conservatives won 121 seats in Parliament compared with 99 in 2015 and have won the popular votes claiming 34.4% over the Liberals’ 33%. Bloc Quebecois was a huge win as they gained 22 seats.

The outcome of the election is unlikely going to drastically change the dynamics in the Canadian markets. On a broader level, there are layers of similarities between the agendas of the different political parties which will help to reduce the uncertainties that generally arises from election results. However, the Liberals governing as a minority government will rely on smaller parties to push legislation which will be challenging.

In the money markets, the Canadian dollar was trading near three-months high against its US counterpart on the Liberals win. The loonie has been on an upswing this year backed mostly by strong economic data and is currently the best performing G10 currencies: Source: Bloomberg Terminal Canada's Economy The Canadian economy outperformed its rivals which allowed the Bank of Canada to keep its benchmark interest rate steady at 1.75% while other central banks have cut their own rates in response to the global backdrop. Employment Employment rose by 54,000 in September driven by gains in full-time work while the unemployment rate declined by 0.2% to 5.5%.

The growth was mostly seen in the self-employment and public sector employees. Source: Bank of Canada Wage Growth The Average Hourly Wage Rate year-on-year in September jumped to 4.25% and marked the strongest month in a decade. Source: Bloomberg Terminal The Wage-common, a wage measure that the Bank of Canada uses to capture the underlying wage pressures reflecting the common trend across data sources rose to 2.7% in the second quarter in 2019.

Source: Bank of Canada Inflation The Bank of Canada aims to keep inflation at the 2% midpoint of an inflation-control target range of 1% to 3%. The recent annual inflation rate stood steady at 1.9% but fell low of market expectations of 2.1%. However, inflation remains close to or on target since March 2019.

Business Outlook Survey The Business Outlook Survey indicator rose to 0.40 which shows a slight improvement in overall sentiment. However, due to the challenges in the energy sector, the sentiment in Prairies remain predominantly negative. The Loonie While major central banks have been cutting interest rates, the BoC has been reluctant to do so despite the global downturn because of the sound economic environment.

The Canadian dollar has been on the rise and has retained the number 1 spot among the G10 currencies against the US dollar. After the election, the prospects of growth-boosting fiscal policies combined with a resilient economy may keep the BoC on the sidelines. If there is a coalition between the Liberals and the NDP, there could be a much larger fiscal spending than originally expected.

Tax cuts would also help to boost consumer spending. Investors are expecting further divergence between the Fed and the BoC. While the BoC is expected to keep its interest rate on hold this year and until late 2020, the Fed is widely expected to cut rates.

In the short-term, we expect the loonie to benefit from the rate divergence and the fiscal boost. In the medium-term, the Canadian dollar may weaken as the effective implementation of the fiscal expansionary policy will lower the Canadian exchange rate. See our introduction to forex for more information, including currency trading for beginners here.

The Psychological effect behind the Stock Markets’ Most Volatile Month. Generally, the volatility in October has been well-above average, and this does have a psychological effect on investors’ minds. The biggest market crashes – Black Monday/Tuesday and other turmoil had occurred in October making it the “Jinx Month”.

The sharp and sudden drop that occurred last week shows that October is living up to its reputation of being the Stock Market Most Volatile Month. It could be investors being superstitious, but so far, there are not known drivers only some theories which include: The return from summer vacations The federal government’s fiscal year which begins on the first of October The third-quarter corporate earnings. On average, more daily moves above 1% are recorded in October.

The S&P500 recorded three more than 1% daily moves already which kind of justified the belief. World Equity Indices (% Change) – Month-to-date Source: Bloomberg Terminal Besides the myth, rising yields are set to be the challenge for this quarter and appear to be the primary driver behind the recent surge in volatility. The prospect of more instability is high and quite alarming given that the US stock markets are already inflated.

The actions by the Fed have also put the stock markets in a dangerous bubble. Are the markets prone to more volatility? Alternatively, does the recent fluctuations signal a bear market?

The recent weeks of volatility are evidence that trading equity will likely remain choppy in the short-term. At this stage, it is difficult to recognise whether the bull market has reached the top and investors need to get out before the bear market or whether investors should stay away from the “buy the dip” strategy in the emerging and Asian equity markets. All in all, short-term investors might find it hard to catch the rhythm of the stock markets, but if investors were to maintain a long-term view, it might be worth listening to Warren Buffet advice: “Buy, Hold and Don’t watch too closely when the market sells off.”

Major Indices took a breather last week, with US equity markets closing down more than 1% after posting record highs the week prior. In economic news, the incoming US administration announced a $1.9 USD trillion fiscal-stimulus plan that aims to counter the effects of COVID-19 and support markets as recent weak economic figures are indicating they are under some stress. COVID-19 With reported deaths in Norway of patients who were recently administered the Pfizer vaccine, US vaccine distribution falling well short of expectations and new coronavirus strains being detected, investors are concerned that economic lockdowns could be longer than hoped.

Equity Markets US markets are closed on Monday for the MLK holiday. After that, the earnings season will kick off with big names like Intel, IBM, Netflix, Intel, Goldman Sachs and Proctor and Gamble reporting this week. These bellwether companies should give an indication of how the US economy has weathered the COVID storm.

Cryptos With impressive rallies the week before, Major Cryptocurrencies pulled back last week but still remained well bid on any significant drop. A strengthening US dollar and comments from ECB President Lagarde regarding the need to regulate Bitcoin could be headwinds going forward for these assets. FX Markets After declining for 3 months straight the US dollar Index bounced off support and rallied close to 1% for the week.

This meant a decline in USD pairs with AUDUSD finishing near the 0.77 big figure. This US dollar strength also weighed on USD denominated commodities, with both Oil and Gold declining for the week. Key events ahead Monday Chinese GDP (AUDUSD, CHINA50, USDCNH) Thursday Bank of Canada rate statement (USDCAD) Australian Employment change and unemployment rate (AUDUSD, ASX200)bank of Japan Monetary policy statement (USDJPY, JP225) ECB Monetary policy statement and press conference (EURUSD.

Euro Indices) Friday Bank of England Governor Bailey speaks (GBPUSD, UK100) New Zealand CPI q/q (NZDUSD) German Manufacturing and services (EURUSD, DAX30) Tuesday, 19 January 2021 Indicative Index Dividends Dividends are in Points ASX200 WS30 US500 US2000 NDX100 CAC40 STOXX50 0 6.777 0.143 0.022 0 0.829 0.257 ESP35 ITA40 FTSE100 DAX30 HK50 JP225 INDIA50 0 0 0 0 0 0 0