Oil prices jumped on Tuesday after the shutdown of a North Sea pipeline knocked out significant supply from an already tightening market, while world stocks took a break from a three-day rally.
Brent crude futures, the international benchmark for oil prices, rose above $65 a barrel – their highest since mid-2015 – after Britain’s Forties pipeline was shut due to cracks as a cold snap sweeps the country.
“The market reaction shows that in a tight market, any supply issue will quickly be reflected in higher prices,” said ANZ bank. Analysts also said the pipeline is a significant component underpinning the Brent benchmark.
U.S. crude oil futures rose nearly 1 percent to $58.51 a barrel. The jump in Brent prices widened its premium to WTI prices to as much as over $7 a barrel, the highest premium since May 2015 and up from around $5 last week, making U.S. oil exports more attractive. The MSCI index of world equities, which tracks stocks across 47 countries, was flat after posting three straight days of gains.
While the jump in oil helped boost commodity-heavy European stock indices, it was not enough to offset weakness in bank stocks, pushing the pan-European STOXX index down 0.1 percent in early trading.
Asian shares took a small step back gaining for three straight sessions; with markets consolidating in the hope an upswing in global growth could outlast a likely hike in U.S. interest rates this week. MSCI’s broadest index of Asia-Pacific shares outside Japan drifted off 0.3 percent, having bounced 2 percent in the past three sessions. Commodity-linked currencies also got a boost from the pick-up in oil prices. The Australian dollar and the New Zealand dollar were both up half a percent while the Norwegian crown rose 0.7 percent.
Investors continued their policy vigil with the Federal Reserve set to end its two-day meeting, while the European Central Bank meets this week.
JPMorgan Economist David Hensley suspects the Fed will revise up its growth forecast while trimming the outlook for the unemployment rate, potentially adding upside risk to the “dot plot” forecasts on interest rates. “The dot plot previously called for three hikes in 2018; it is a close call whether this moves to four hikes,” he warned, a shift that would likely boost the dollar but could bludgeon bonds.
“For its part, the European Central Bank (ECB)is likely to emphasize its low-for-long stance and continue to distance itself from the Fed,” he added. “The staff is likely to revise up its 2018 growth forecast, while we think the core inflation forecast will reveal an even slower recovery than before.”
The divergence in Fed and ECB policy was supposed to be bullish for the dollar, given it had widened the premium offered by U.S. two-year yields over German yields to 256 basis points from 188 basis points this time last year.
The last time the spread was that plump was in 1999. Yet the euro is currently up 12 percent on the dollar this year, while the dollar is down 8 percent on a basket of currencies – an indication that interest rate differentials aren’t everything in forex.
The dollar was idling at 113.42 yen, just off a one-month top of 113.69, while the index that measures it against a basket of peers was down 0.1 percent.
Dealers at Citi noted interbank volumes in the forex market had been 35 percent below average overnight and another thin session was in prospect for Tuesday.
There was a little more action in bitcoin, which was last up 1 percent on the day at $16,598 on the Bitstamp exchange while its newly minted futures contract fell slightly to stand at $18,545.
Gold remained out of favour at $1,244.70 an ounce having suffered its biggest weekly drop since May last week.