The Overnight Report: Wasted Energy

This story features NATIONAL AUSTRALIA BANK LIMITED. For more info SHARE ANALYSIS: NAB

By Greg Peel

The Dow closed down 117 points or 0.7% while the S&P fell 0.7% to 2077 and the Nasdaq lost 0.8%.

The Bad Oil

One year ago the world assumed that the regular December OPEC meeting would bring about announced production cuts to stem the tide of the falling oil price, as that’s what OPEC had always done in the past. The WTI crude price had fallen from above US$100/bbl to US$60 at that time. But OPEC did not cut.

Instead, as it turns out, OPEC, and Saudi Arabia in particular, increased oil sales at whatever price obtainable in order to protect market share, leaving it to the US shale producers to provide the production cuts given it was they who had brought about global oversupply. In late January WTI hit US$45.

Signs of apparent US production reduction, via lower rig counts, took oil back to US$60 in June but supply volumes just kept going up. WTI almost went through US$40 in August before stabilising, but overnight, in the wake of another OPEC meeting featuring no announced production cuts, West Texas has fallen US$2.43 or 6% to US$37.62/bbl – its lowest level since 2009.

This seems a delayed reaction. The OPEC meeting was held on Friday night and oil markets traded only slightly lower on the session, probably because no one really expected OPEC to cut anyway. Maybe Wall Street needed the weekend to think about it, away from the euphoric fog of Friday’s jobs number and Mario Draghi’s reassured commitment to QE. OPEC is backing a combination of US shale reduction and growing global demand to stabilise prices in 2016. But right now, US crude supply continues to grow and global demand, particularly that from China, is sluggish.

This scenario was apparently not lost on one or more investors who decided to slam Australian oil stocks yesterday. The ASX200 opened up 78 points, erasing the previous session’s “Draghi Disappointment” falls, in concert with the big rally on Wall Street. But in moved the energy sector sellers, and by lunchtime the index was flat, where it remained for the rest of the session. The telcos were the only other sector to see notable selling, down 1.9%. Otherwise all sector moves were negligible bar energy, which fell 4.6%.

It was smart selling, in retrospect. Oil prices did not start the tumble that has taken WTI well below 40 and Brent knocking on the door until after the local close yesterday.

Rock and Roll

It’s been a wild ride for Wall Street these past three sessions. Dow down 250 points on Thursday night on Draghi disappointment, up 350 points on Friday night on jobs and Draghi back-tracking, down 100 points last night on the oil price slide. The Dow was down 200 points at one stage last night, so at least there are some prepared to buy.

Oil did not impact upon European markets last night, as one might expect given Europe is an oil & gas importer, whereas Australia is an exporter and the US is a self-sufficient producer (if we bring along Canada and Mexico). Responding to US jobs and Draghi at the first opportunity last night, the German stock market jumped 1.3% and France 0.9%. There are oil names listed in London, but the FTSE only fell 0.2%.

The flow-on issue for Wall Street with regard falling oil prices is credit defaults. US business television has already been publishing lists of oil companies deemed most likely to go bankrupt were oil to fall below 40, but before bankruptcy comes default. US banks, many of the smaller regional variety, previously lent money to shale oil aspirants on the basis they hedge their production at the time. Those hedges, which would have been placed anywhere up to US$100/bbl, have been rolling off this year and rollover values at US$40/bbl mean an incapacity to service loans.

Having experienced a GFC in silly home loans, a still nervous Wall Street is always on the lookout for new GFCs in the making. There has been much concern that surging US auto sales these past few years are the result of cheap finance and “subprime” car loans, but it turns out car dealers have actually been quite tight with their finance criteria. For a while now oil loans in a low interest rate environment have been a source of angst. The jury is still out on whether a wave of oil company defaults will set in train a wave of bank failures, and whether that will reach to the high end.

The Fed is set to commence raising interest rates next week.

Commodities

As noted, West Texas crude is down US$2.43 or 6% at US$37.62/bbl. Brent is down US$2.41 or 5.5% at US$40.66/bbl. Even the US natgas price fell 5.5% last night.

The moves have little to do with the US dollar, which is up only 0.3% on its index at 98.64.

Base metals actually saw some short-covering on Friday night on the strong US jobs number, which cements a Fed rate rise. Last night traders seemed to have changed their minds nevertheless, in what has been described as a slow day that highlights the rapid approach of year-end. Copper and tin fell 1%, aluminium, nickel and zinc fell 2%.

That other member of the sub-40 club, iron ore, is down another US50c to US$38.90/t.

Gold’s moment in the sun didn’t last, confirming a short-covering scramble on Friday night. Gold is down US$15.20 at US$10.71.30/oz.

Today

Although oil prices crashed overnight, the Australian market arguably saw its oil-related sell-off yesterday. The SPI Overnight closed down 14 points.

The NAB business confidence survey is out locally today. China will release November trade numbers.

National Bank ((NAB)) has provided an update on the progress of its UK demerger.
 

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