Daily Market Reports | Feb 20 2008
By Greg Peel
Nymex crude oil futures – the bellwether oil price indicator – had previously traded above US$100/bbl on two occasions before last night but failed to close a session in triple digits. We have since had two good attempts at pushing well into the US$80s based on US recession fears, but still the vital commodity has pushed back. Last night oil for March delivery closed up US$4.51 at US$100.01/bbl.
The historic close comes despite recent reports from both the US Energy Department and the International Energy Agency suggesting oil demand will fall as a result of the US slow-down. OPEC also believes demand is falling, and thus it is looking to cut production in coming months. And that intention has become part of the problem.
Not that OPEC ever really does cut production, but the truth is wise heads believe OPEC has little upside left in its capacity and that in itself is worrisome. But the reasons for last night’s rally include other factors. For one, it has been the ongoing battle between Venezuela’s President Chavez and US oil giant Exxon that has helped push oil back through the nineties the past few days. That continues. Then on the weekend a fire at a refinery in Texas cut production of gasoline and heating oil. Those two products saw the main thrust of upward pressure last night and dragged crude along with them. There was also an outage at a refinery in Hawaii.
The final straw was unconfirmed rumours coming from Nigeria that a rebel leader had been killed, prompting threats of violent retaliation. The favourite sport of Nigerian rebels is to blow up the country’s oil pipelines. Nigeria is a major exporter of favoured light, sweet crude.
The strong push in oil and oil product prices has seen a similar response from the natural gas price, where traders have been caught short.
The day had started on a positive note on Wall Street as Dow component Wal-Mart “beat the Street” with a 4% rise in fourth quarter profits. The NAHB housing index also showed an increase from 19 in January to 20 in February, suggesting homebuilders are beginning to feel less depressed. But as oil started rising it was good news for the likes of Exxon and Chevron but not so much for anybody else. Coincidently, Chevron was introduced into the Dow Jones Industrial Average last night.
Also joining the index was Bank of America. The Dow remains at 30 stocks with tobacco merchant Altria and engineering and aerospace product manufacturer Honeywell bowing out.
The Dow closed down 11 points last night having been up 157 points early in the session. The S&P slipped a similar 0.09%, but the Nasdaq copped a 0.7% fall. Tech stocks were particularly hit on the inflation concerns the higher oil price intensifies. Worrying traders once again was that the early rally occurred on light volume, but as the tide turned volume began to noticeably pick up.
Oil was not the only commodity pushing higher. Base metals in London continued gains post the official close. Copper and zinc were up 3%, lead 4%, and nickel and aluminium more than 1% higher. This all adds to the inflation concerns now dominating the world. Evidence suggests commodity funds, which had withdrawn from the market due to US recession concerns, are now coming back to play again. Whether or not the US recedes or simply slows, the demand for commodities out of Asia appears unabated.
The US dollar was mostly weaker overnight – another factor bolstering the oil price. A lower dollar, oil, and general inflation concerns saw gold make another one of its big pushes – up US$21.20 to US$927.40/oz. The Aussie jumped again yesterday following the hawkish RBA minutes, and is sitting around the US$0.92 mark.
There were also big moves in US bonds last night, tempered only in the end by the Dow reversal. At the short end, traders had been flocking to the 2-years on expectations of further aggressive Fed cutting. That rate had fallen below 2%. But last night it pushed back 18bps to 2.07%, while 5-years posted the same gain to 2.94%. The 10-years added 10bps to 3.90% and the 30-years 5bps to 4.67%. At the short end, traders are now wondering whether indeed the Fed can cut rates further in the face of rising inflation. At the long end, it’s just about rising inflation.
The financials sector did not enjoy the session either. News from across the Atlantic was that both Barclays and Credit Suisse both wrote down another US$3bn against debt securities. Credit Suisse also sacked traders for what amounts to previously dressing up the value of distressed securities. You’d think after all the write-downs, all the turmoil, and SocGen in particular, European banks would have scoured their positions for any signs of misrepresentation. But no – these idiots are either clueless, or complicit, choosing to scape-goat some traders in order to save their own sorry backsides. Accounting rules have changed in the US forcing US banks and brokerages to be realistic about valuations. There has not been the same move yet in Europe. What’s left to emerge?
On that note, US brokerage Lehman Bros, which to date has been praised for riding through the subprime crisis relatively well, surprised the market by writing down another US$1.3bn.
The SPI Overnight lost 11 points.
