The Overnight Report: The Good Oil

This story features FORTESCUE LIMITED, and other companies. For more info SHARE ANALYSIS: FMG

By Greg Peel

The Dow closed up 75 points or 0.4% while the S&P gained 0.5% to 2106 and the Nasdaq added 0.7%.

China Contradiction

China’s annual GDP growth rate slowed to 7.0% in the March quarter from 7.3% in December as expected. It’s China’s slowest rate of growth since the post-Lehman quarter of March 2009. Economists now expect the June quarter reading to come in below the 7% mark, based on the trend evident in yesterday’s data breakdown for the month of March.

Industrial production growth slowed to 5.6% year on year from 6.8% in January-February and missed forecasts of 7.0%. Retail sales growth slowed to 10.2% from 10.7% in Jan-Feb. Fixed asset investment growth slowed to 13.5% in the year to March from 13.9% in the year to February when 13.9% was forecast.

But do you know which sectors outperformed on Bridget Street yesterday? Materials and energy. They were up 0.7% and 1.0% respectively. Meanwhile every other sector was down, with the popular yield plays seemingly sold in a switch into cyclical resources.

Clearly investors are starting to feel a trough may have been seen for critical iron ore and oil prices. Iron ore was back over US$50/t yesterday, and West Texas crude has also returned above US$50/bbl. Analysts do not agree, and as is evident in FNArena’s run of Material Matters stories this week, views on iron ore remain depressed and oil not much better. But the other point is that Beijing has already indicated it is ready to pump more stimulus into the Chinese economy, thus the weaker the data the more likely, and more significant, new stimulus measures become.

Thus weak Chinese data is almost a US-style bad news is good news story.

There was no good news for the local consumer discretionary sector yesterday however, which led the market down with a 1.6% drop. Westpac’s consumer confidence index for April showed a 3.2% decrease further into pessimism territory to 96.2. The boost in confidence enjoyed thanks to the February RBA rate cut has now been wiped out by a lack of RBA follow-up to date and by growing fears over just which hip pocket nerve Joe Hockey is going to pinch in this year’s budget attempt.

Any joy from lower petrol prices has also now faded away, given the oil price has bounced but the Aussie has not.

Bottom Picking

Have we seen the low in the oil price? That is the question everyone is asking and while not everyone is prepared to say definitively, the feeling is this may be the case.

Critical to the balance between a falling US rig count and today’s oil price is the lag time between a rig shutting down and the impact of that lost supply actually flowing through to inventory data. Also critical is the fact most shale oil producers were required to hedge their production in order to be granted the bank loans they needed to fund their production, thus for many there is no rush to shut down rigs. Indeed, many a producer will have been hoping the hedge will hold out until oil prices recover.

But last night’s weekly US crude inventory data showed a smaller than expected increase, suggesting the over-supply issue may indeed be easing. These weekly data are notoriously volatile and forecasters famously never get them right. But if you think the oil price may have bottomed, and you’ve not yet acted on that belief, you’re not going to stand there quibbling about volatility.

Last night West Texas crude jumped US$2.44 or 4.6% to US$56.01/bbl and Brent rose US$1.39 or 2.4% to US$60.32/bbl. When WTI broke through 54 it signalled a major technical breach, no doubt fuelling the fire.

Wall Street Energy

The jump in oil prices and subsequent jump in energy stocks was a driver of strength on US stock markets last night. Tuesday night’s aftermarket earnings beat from Intel (Dow) saw its shares rise 4.3% and provide a boost to the tech sector. In rising 0.7% last night, the Nasdaq is back over 5000.

It should also be noted the Russell 2000 small cap index hit a new all-time high last night.

But it wasn’t all beer and skittles. Bank of America posted an earnings miss which saw its shares fall over 1%. The Empire State activity index has plunged into contraction this month at minus 1.2, down from March’s plus 6.9. US industrial production fell by 0.6% in March compared to 0.4% forecasts, although intentional oil production cutbacks impact on that number.

The Fed Beige Book, released last night, acknowledged the loss of jobs in the energy industry. But it also noted moderate economic growth in eight of twelve Fed districts, despite the headwinds of a strong US dollar, falling oil prices and a lot of snow over the period. One positive area of the economy highlighted by the Fed was housing, and last night the monthly housing market sentiment index showed a rise to 56 from 52 in March, with 50 being neutral.

Fleeting Joy

The largely weak US data has sent the US dollar index down 0.5% to 98.34. The result is a 0.7% jump in the Aussie to US$0.7680, and a US$9.80 rebound for gold to US$1201.80/oz.

The weaker greenback helped base metal to rise last night, but LME traders also played the bad-news-is-good-news game with regard Chinese stimulus expectations. Aluminium jumped 2% and the others were all up by less than 1%, except tin. Uncertainty regarding possible Indonesian exports bans is causing a lot of volatility in the most expensive of base metals at present, and tin was down 3%.

If iron ore producers living on the edge were breathing a sigh of relief yesterday, seeing the spot price jump back over 50, shoulders will sag again today on a US40c fall to US$49.70/t. It’s only a 40c fall, but it means no follow-though on the 50 breach.

Today

We should otherwise be in for a positive session on Bridge Street today if the SPI Overnight is any gauge. It closed up 36 points or 0.6%. No doubt energy stocks will be looking attractive.

The March jobs numbers are out in Australia today, with economists expecting a steady unemployment rate of 6.3%.

On the local stock front, today sees production reports from Fortescue Metals ((FMG)), Iluka Resources ((ILU)) and Whitehaven Coal ((WHC)), while Challenger ((CGF)) will provide a quarterly update and Woodside Petroleum ((WPL)) will hold its AGM.
 

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