The Overnight Report: Oil Fights Back

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By Greg Peel

The Dow closed up 112 points or 0.6% while the S&P rose 1.1% to 2066 as the Nasdaq jumped 1.7%.

Can’t buy it, can’t sell it

While the ASX200 keeps finding reasons of late not to push up sustainably beyond 5000 – perceived bank woes are a case in point most recently – it just doesn’t like being under 5000 for very long either. While it was a choppy session on Bridge Street yesterday as sellers and buyers battled it out, the buyers won out in the end without any real incentive to do so other than every time the index falls below 5000, it pretty soon recovers.

The energy sector was the exception yesterday, rising 3.2% because the oil price recovered from an initial fall on Tuesday night and closed slightly higher. Traders in oil stocks must by now have very stiff necks from whiplash as they stampede backwards and forwards on every one dollar move in the oil price, only to find themselves forever back where they started.

Beyond energy, there appeared to be some bargain hunting going on in the industrials, healthcare, materials and consumer discretionary stocks yesterday. The banks closed relatively steady, which at the moment is a good day for the banks, while telcos fell, having not fallen on Tuesday, and consumer staples saw minor selling.

Buyers of oil stocks will nevertheless be feeling chuffed this morning following another jump in oil prices overnight. The ASX200 closed 55 points shy of 5000 yesterday and will likely close some of that gap today. The overnight futures are calling 18 points up but then they were calling 18 points down yesterday morning, and we closed up 21. An outside bet on 5000 being recovered today is not a silly one.

Oil Shock

US crude inventories fell by 4.9m barrels last week. Analysts had predicted a 2.9m increase. I don’t ever recall analysts getting the weekly numbers spot on but this is a bit of boilover. For those who get a bit warm and fuzzy over stats, it is the biggest fall in crude inventories for this particular week of the year since 1997.

When WTI futures “closed” early in the afternoon, the benchmark oil price was up over 5%. The market doesn’t actually “close”, it simply switches to electronic trading and carries on non-stop from Monday morning to Saturday morning. A closing price is nevertheless marked for bookkeeping purposes. Since that mark WTI has come off a bit, to be up 3%.

The oil price rally pretty much turned around what had threatened to be a weak session. Wall Street was soggy on the open, in line with European trading which had been soggy for most of the day. After the shock fall in German manufacturing orders revealed on Tuesday night, last night saw German industrial production for February falling 0.5%. This actually wasn’t too bad a result given forecasts were for a 1.8% fall.

The minutes of the March Fed meeting were also scrutinised last night. While Yellen’s speech last week largely rendered these minutes redundant, what was interesting was a debate between FOMC members about whether April should see a rate rise. Those believing April is too soon apparently won out.

Now, Yellen has suggested that April remains “live”, meaning the Fed could still hike if it so decided, but then every meeting has to, by default, be deemed “live” or what’s the point holding it? What we saw in the minutes was a rather unusual discussion about the future rather than the moment, ie whether or not to raise in March, and despite Yellen’s speech implying even June is looking unlikely, the fact April can be taken off the table was at least enough incentive for traders to pile back into “risk” stocks last night.

The epitome of “risk” stocks are the US biotechs, and with risk you get “momentum” traders. So when biotechs began to move up last night, the bandwagon was jumped upon. That’s why the Nasdaq was up 1.7% when the Dow only managed 0.6%. The S&P split the difference.

It could just as easily completely reverse in a session or two. Yellen will speak again tomorrow morning Sydney time, after the close of Wall Street tonight.

So between oil and a “momo” rally, Wall Street had a positive session last night.

Commodities

We recall that producers within and without OPEC are planning to meet in Doha in a couple of weekends to discuss a production freeze. Last night the Kuwaiti oil minister expressed confidence that an agreement would be reached. This clown is probably cracking the champagne as we speak believing he managed to orchestrate a 5% oil price jump when all of OPEC knows a production freeze is complete fantasy.

Only supply curtailment in the US will move oil prices higher. Last night’s weekly US inventory drop is why oil prices are up.

West Texas is up US$1.21 or 3.3% at US$37.73/bbl and Brent is up US$1.47 or 3.8% at US$39.81/bbl.

Yet again there were mixed moves in base metals last night. No move exceeded one percent.

Iron ore fell US20c to US$53.80/t.

The US dollar index is down slightly to 94.50 but gold is also down US$8.90 at US$122.30/oz.

One presumes the 0.8% rally back for the Aussie overnight to US$0.7600 is oil-linked.

Today

The SPI Overnight closed up 18 points or 0.4%.

As noted, Yellen’s speech will begin after Wall Street closes tonight.

Before that, we’ll see the local construction PMI and Bank of Queensland ((BOQ)) will publish its first half result.

Rudi will make his weekly appearance on Sky Business, 12.30pm-2.30pm and re-appear again on Switzer TV between 7-8pm.
 

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