The Overnight Report: Sub Sixty Oil

Array
(
    [0] => Array
        (
            [0] => ((WBC))
        )

    [1] => Array
        (
            [0] => WBC
        )

)

This story features WESTPAC BANKING CORPORATION.
For more info SHARE ANALYSIS: WBC
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow closed up 63 points or 0.4% while the S&P gained 0.5% to 2035 and the Nasdaq rose 0.5%.

There is no end in sight, as yet, for the drop in global oil prices and the flow-on impact into Australian energy stocks. The iron ore price appears to have stabilised somewhat but is engendering no confidence. In typical years it is normal to see the iron ore price under pressure in the September-November period as Chinese steelmakers run down their stocks but by December the price typically recovers as steelmakers begin restocking ahead of winter. This year they are not restocking.

Weakness continued on Bridge Street yesterday although in the face of a 200 plus drop on Wall Street it could have been worse. Mind you, we’ve taken quite a few body blows this last couple of months. The whipping boys du jour were hit again yesterday on lower commodity prices, with energy down 2.8% and materials down 1.2%, but a switch into defensives was again evident as providing some support, with healthcare up 0.8% and telcos up 1.2%. After their brief post-FSI relief bounce, the banks are still under pressure (down 0.5%).

West Texas crude broke 60 last night on Nymex on a closing price basis. It fell US$1.10 to US$59.83/bbl and Brent fell US60c to US$63.66/bbl. Traders have for a while suggested “look out if WTI breaks 60” while others have suggested “more importantly, look out if Brent breaks 65”.

So look out.

There is nevertheless talk now from analysts that (a) the price of oil has fallen further than the global under-demand/over-supply balance would imply, on simple get-me-out fear, and (b) energy stock prices have fallen further than the current price of oil would imply, ditto. This would suggest that at some point, we’ll see a bounce. The breach of 60-65 for the oils may bring out the brave contrarians, but if you want to play that game you have to be prepared to be hit by a freight train if you’re a tad early.

The afternoon drop in WTI below 60 last night took the wind out of the sails of what had been an out-of-the-blocks rally on Wall Street which threatened to wipe out all of Wednesday night’s losses. At lunchtime the Dow was up 225 points, the impetus for which was a surprisingly strong November US retail sales number.

Sales rose 0.7% in the month that includes the traditional Thanksgiving spend-frenzy, up from October sales which themselves were revised up to a 0.5% gain from an earlier 0.3%. It’s the biggest move in eight months. Auto sales were very strong, up 1.7%, but the ex-autos result of up 0.5% still blew economists away.

Economists had forecast 0.4% net sales growth in November and only 0.1% ex-autos growth. It is becoming apparent, in sales of autos for one but also in general consumer spending, that the expected boost from lower oil prices is beginning to manifest.

Which is why it’s somewhat ironic that another fall in oil mostly killed off Wall Street’s rally. As I noted yesterday, Wall Street, Bridge Street and the rest of the world are still trying to come to terms with a new global energy regime that has happened so fast, heads are still spinning. “Is it good, is it bad, I don’t know, what do you think?” What is clear is that we will need to see the oil price stabilise before anyone can become sufficiently confident in their view.

The strong US retail sales number at least sparked up the US dollar, which rose 0.4% on its index to 88.70. The bond market wasn’t having it however, as the ten-year yield is only up one basis point to 2.18%. Gold is steady at 1228.00/oz.

The rise in the greenback, following on from Wednesday night’s drop, opened the gate for the Aussie to continue moving to where it should be on a commodity prices basis. It is down 0.6% to US$0.8256.

Base metals remain confused as always. They were equally up and down last night, with lead’s fall the only move above 1%.

Iron ore fell US10c to US$68.80/t.

The SPI Overnight fell 9 points.

China is in the frame today, with its monthly data dump of industrial production, retail sales and fixed asset investment numbers. We'll see industrial production numbers from Japan, and tonight the same from the eurozone, along with September quarter unemployment.

In the US we’ll see wholesale inflation and the fortnightly Michigan Uni consumer sentiment survey.

Westpac ((WBC)) will hold its AGM today – a timely opportunity to be the first to discuss the FSI and recent APRA/ASIC announcements.

Stay well away from CBD streets tonight. It will be madness.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Click to view our Glossary of Financial Terms