The Overnight Report: Reality Bites For Oil

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By Greg Peel

The Dow closed up 79 points or 0.5% while the S&P managed only 0.2% with the Nasdaq up 0.1%.

Hope Restored

It does get a bit silly sometimes, doesn’t it? Down a hundred one day and back up a hundred the next. What changed? The oil price went up and the US dollar went down.

The oil price has every chance of going back down again, although in USD terms it will find some support from what now appears to be a greenback set to trade lower as the market abandons the idea of a Fed rate hike in March, or even possibly in 2016. But unfortunately for the Australian market, hopes of an Aussie dollar in the mid-sixties now seem premature at best.

I noted that Wednesday’s sell-off was fairly orderly and relatively uniform across sectors, other than concentrated selling in the resource sectors and not so much selling in genuine yield stocks. Yesterday’s rally was also fairly orderly, but not so uniform across sectors.

The energy and materials sectors both jumped 6.2%. On Wednesday everyone was worried about dividends and yesterday it seemed all was forgiven. It must be noted that valuations for these sectors have fallen so far, their index-weighting impact is nothing like it used to be. Thus yesterday’s 2.2% rally in the banks – another beaten down sector – had greater clout.

If the Fed is now on hold then Australian yield stocks are once again more valuable to offshore investors, assuming the RBA is also on hold for a while. Utilities (+2.5%) were again an outperformer yesterday. But thereafter, other sectors that were sold down on Wednesday did not necessarily pick it all back up yesterday. Indeed, healthcare was down 0.8%, suggesting traders sold the winners to buy the losers, and consumer discretionary was down 0.6%. Outside of your big-name chains, there have been some high flying retailers of late as well to offer up profit-taking opportunities.

One stock that didn’t join in the spoils yesterday was Macquarie Group ((MQG)), which lost 5% after revealing the earnings impact of recent market volatility. Macquarie is nevertheless in exalted company, with Goldman Sachs suffering a similar fate earlier this week in the US and what can only be described as carnage being suffered by European investment banks, with the likes of Deutsche Bank, UBS and Credit Suisse all posting huge losses and write-downs of late.

It appears European banks have been relatively larger lenders to the energy sector than US banks. And as for wealth management, well, everyone has been hit hard there. Everyone saw the US ten-year yield going to 3% (it’s now 1.86%), the US dollar soaring (it’s down 3% just this week), and the US economy picking up (a mere 1.8% for 2015). No one saw thirty dollar oil.

And on the subject of oil…

After rallying 8% on Wednesday night, West Texas crude took off again early in last night’s session, putting on another dollar per barrel. But at that point the dip-buying and short-covering appeared to exhaust itself. As Wile E. Coyote stood there in mid-air, a few feet from the cliff edge, he contemplated Wednesday night’s US crude inventory data, showing more stored oil than ever in history, and the fact data show US production is continuing to rise, not fall. Gravity did the rest.

Another 0.8% drop in the US dollar index to 96.51 was not enough to prevent a mid-session plunge in oil prices, to close down 2% on the day.

US production continues to rise because smaller producers, running cash flow negative, will not turn off the pumps until all hope of a price rebound is lost. Just like Saudi Arabia and Russia, they have to keep pumping oil as fast as possible to at least minimise the cash burn. The irony is, of course, that the oil price will only rebound when enough producers finally bite the bullet.

We’ve seen this happen among Australian nickel producers, but unfortunately Australia alone does not produce enough nickel to make much of a global difference.

And a shudder went through Wall Street last night on the announcement from US energy major ConocoPhillips of a cut in dividend. Though not exactly a shock, it was still a case of reality bites.

Meanwhile, last night’s US data releases showed a 3% fall in productivity over the December quarter – the biggest decline in a couple of years – and a 2.9% fall in factory orders in the month of December.

The Dow was up a hundred points on the oil rally mid-morning, back to flat by midday on the oil turnaround, and up again late in the session on a bump and grind. Weak data, let’s not forget, is good at the moment.

Commodities

West Texas crude is down US66c or 2.0% at US$31.67/bbl and Brent is down US67c or 1.9% at US$34.39/bbl.

Base metal prices continued to rise on the LME last night, quietly, on the ongoing theme of squaring up ahead of Chinese New Year and with some help from the weaker greenback. There were 1% gains across the spectrum except for lead (0.5%) and nickel (0.3%).

Iron ore is up another US70c at US$44.70/t.

Gold’s revival continues on the weaker US dollar. It’s up US$15.20 to US$1155.60/oz.

The Aussie is up another 0.4% at US$0.7200.

Today

The SPI Overnight closed down 14 points or 0.3%.

The RBA will release a quarterly Statement on Monetary Policy today following releases for all-important December retail sales, and the January construction PMI.

Tonight is non-farm payrolls night in the US.

The local earnings season will today feature results from Genworth Mortgage Insurance ((GMA)), News Corp ((NWS)), REA Group ((REA)) and Whitehaven Coal ((WHC)).
 

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