Australian Investment Blog

OPEC looks set to rally stocks into 2017

Last night, OPEC shocked markets by agreeing to a preliminary deal to cut oil production for the first time in 8-years. Nobody was expecting Iran and Saudi Arabia to resolve their differences so quickly. In the US oil surged over 5.5% taking with it the energy stocks which rallied 4.3% as a sector.

This is a significant policy switch by the Saudi's from 2-years ago, when they turned on the pumps to flood the market with oil in an attempt to defeat the shale gas threat primarily coming from the US. We are now witnessing OPEC reducing production to manage the oil price which should lead the price of Crude move higher.

This is a massive policy change by Saudi Arabia, born out of necessity as their economy comes under increasing pressure with a ballooning budget deficit.

Last night's strong rally by Crude Oil reaffirms our bullish outlook targeting the low $US60 region i.e. around 30% higher.

Crude Oil Weekly Chart

We currently hold 10% of our portfolio via the leveraged play, Origin Energy (ORG). Our initial target is $6.25, with a strong possibility of a rally over $7 - assuming oil unfolds as we are forecasting.

Origin Energy (ORG) Weekly Chart

The rally from the energy stocks helped the US market rally for a second night, leaving the S&P500 only 1% below its all-time high - not a great outcome for the many bears out there. Pinpointing tops in markets is extremely hard and definitely part guess work, but our preferred scenario remains a further 7-8% gain from US stocks before the major alarm bells start ringing.

NYSE Composite Index Monthly Chart

Recently we looked at the $A and saw a pattern that was similar to that in 2014 prior to big fall by the $A. We have not taken a 360-degree change of view short-term and are looking for an ongoing "ABC" correction over 80c.

Since the major top in the ASX200 (just under 6000) in 2015, the Australian stock market has followed the $A very closely. There is no reason to believe this strong correlation will not continue, hence we remain positive the ASX200, like US equities with a potential target of the 5700 area.

ASX200 v $A Weekly Chart

Summary

1. We remain bullish oil and the sector while December Crude can trade over $US45/barrel.
2. We remain bullish US equities, targeting further 7-8% gains.
3. We remain positive the ASX200 with a top likely when the $A reaches ~80-81c.

Overnight Market Matters Wrap

• The US markets rallied on a report that agreement had been reached between OPEC members to cut production of oil. The Dow rose 111 points (+0.6%) to 18,338 whilst the S&P500 finished up 11 points (+0.5%) to 2,171.
• Oil was again the focus of the night with reports from Reuters saying that the group members of OPEC has struck a deal to limit crude output at its next policy meeting in November, which is its first cut since the market crashed two years ago. Crude finished up US$2.49 (+5.6%) to US$47.16/bbl.
• The ASX 200 is expected to open stronger this morning, around the 5,462 level, as indicated by the December SPI Futures.

All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 29/09/2016. 9:00AM.

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