The Overnight Report: Oil Gets Real

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

By Greg Peel

The Dow closed up 53 points or 0.3% while the S&P gained 0.4% to 1929 and the Nasdaq rose 0.9%.

Four Horsemen

Typically when we see a one hundred point fall in the ASX200 on a session it is as the result of market-wide fear on a macro level and selling is widespread across the sectors. All the ducks line up, with maybe the defensive sectors not faring quite as badly.

Yesterday’s hundred point fall was very different – it only occurred in four of ten sectors. Six sectors saw negligible moves by comparison.

There was one macro influence – the PBoC again devalued the renminbi. But otherwise the drivers were sector-based at the global level or individual stock-based at the micro level. Wall Street provided a weak lead as the oil price fell back from its artificial expiry day rally and major US bank JP Morgan admitted it was having a dreadful March quarter. We therefore saw the local energy sector down 3.4%, albeit such moves are becoming rather commonplace, both down and up, and we saw the banks down 2.5%. The latter provided the bulk of the 2.1% index drop.

Otherwise, it appeared a lot of BHP Billiton ((BHP)) investors, no doubt including those offshore, took a day to think about whether owning a stock offering little growth and exposure to ongoing commodity price volatility, but now paying only three-quarters of its previous dividend, is worth owning. An 8% shellacking – the worst day for BHP since 2008 — provided the answer. The materials sectors closed down 3.6%.

And finally, investors in Wesfarmers ((WES)) were hit with the stark reality that when you invest in Coles, you get coal. On the release of the company’s earnings result that stock fell 5%, and the consumer staples sector closed down 3.4%.

Info tech fell 1.8% but is tiny by market cap, and beyond that a 0.4% drop for healthcare was as bad as it got.

It’s another very big day for results season today.

Comeback

The Saudi oil minister’s admission that there’s no sense in seeking OPEC production cuts was still ringing in the ears of oil traders last night as they sent the WTI price down 4% from the open. The US stock markets dutifully followed suit, and in the first half hour the Dow was down 266 points.

But then the weekly US inventory data were released. The week’s crude inventory build proved to be only half of that previously assumed. Importantly, crude production fell over the week. To date crude production has been growing even as the rig count falls as desperate marginal producers try to squeeze out as much cash as possible in a vain hope to stave off the inevitable. And gasoline inventories fell, suggesting there may finally be some sign of demand growth thanks to lower prices.

It was enough to turn the oil price around and send it into the green by the close. Maybe oil futures traders, and Wall Street traders in general, will finally now realise that listening to OPEC and Russian rhetoric is a fool’s errand that is only serving to inflate volatility. If the oil price is ever to rise, the basis for that rise must begin in the US.

On that note, the first ever LNG cargo to leave mainland USA is about to set sail to Brazil. America’s fledgling LNG exporters also have Europe and Asia in the sights.

As oil turned, so did the US stock markets, all the way back to a 50 point gain for the Dow.

Somewhere in the background were a couple of disturbing US economic data releases. Sales of new homes plunged in January to their lowest level since October. A flash estimate of the February service sector PMI suggested a collapse into contraction territory for the first time since the US government shutdown of 2013. The US service sector far outweighs the manufacturing sector.

Of course, we are still in “bad news is good news” mode, so any weak data only serve to stave off the next Fed rate hike.

Commodities

West Texas crude is up US37c at US$32.18/bbl, while Brent is up US$1.21 at US$34.46/bbl.

Inventory data helped aluminium and zinc to 2% gains on the LME last night while the other metals trod water.

Iron ore fell US30c to US$50.20/t.

The US dollar index is steady at 97.48 but gold is up US$5.30 at US$1229.00/oz.

The Aussie is steady at US$0.7210.

Today

The SPI Overnight closed up 31 points or 0.6%.

On the back of yesterday’s weak local December quarter wage growth numbers, today sees all-important private sector capex.

Today’s earnings calendar includes high-flyers Blackmores ((BKL)) and Seek ((SEK)) along with Perpetual ((PPT)), Ramsay Health Care ((RHC)) and South32 ((S32)).

Rudi will appear on Switzer TV, tonight on Sky Business, between 7-8pm.
 

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