The Overnight Report: Oil Shock

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By Greg Peel

The Dow closed up 110 points or 0.6% while the S&P gained 0.5% to 2171 and the Nasdaq rose 0.2%.

Flat

Yesterday morning the Dow had closed up 133 points and the SPI Overnight had closed down 6 points. I suggested the disparity reflected the fact the Australian market had rallied back from early lows thanks to the Trump-Clinton debate and hence it was Wall Street playing catch-up.

No one told the computers, which is, I assumed, why the ASX200 bizarrely spiked up 30 points on the opening rotation yesterday morning before the humans sent it straight back down again to the flatline, where it then spent the rest of the session.

While most sectors closed little changed yesterday there were some big movers. Energy fell 1.2% as expected on the lower oil price, which was driven down by Saudi Arabia killing off any idea of an agreement being reached at the meeting in Algeria.

Energy sector traders will have whiplash today. Never trust any comment coming out of OPEC.

On the buy-side we saw a 0.9% gain in consumer staples thanks to a 2% rally in Woolworths ((WOW)) following the supermarket’s legal victory over Masters JV partner Lowes. And we saw a 2.2% spike for utilities thanks to a 6% pop in AGL Energy ((AGL)) following the announcement of a buyback and increased dividend payout ratio.

Beyond that there seemed little incentive to do anything much.

My God, there is a wolf

For over a year oil prices have been undergoing regular spikes on suggestions from OPEC members an agreement to cut oil production is in the offing. No one ever believes the suggestions, and the oil price always falls back down again, but it still rises each time just in case, one day, it might actually happen.

Oil prices rallied ahead of the meeting in Algeria on the same tired old talk no one really believed, and sure enough yesterday dropped again when Saudi Arabia insisted the meeting was not one at which an agreement would be reached.

Last night the weekly US inventory numbers surprised to the upside so oil fell further, that is until a shock Reuters report hit the wire.

OPEC has agreed to limit production to 32.5-33.0 million barrels per day, down from August’s 33.2mbpd level, beginning in November. The cartel will nut out the details at its formal meeting in November but it appears that in order to appease Iran and other members suffering their own individual problems, such as Nigeria, exemptions will be granted.

Once the new level has been established OPEC will then encourage non-OPEC members to get on board to establish global production limits.

Good luck with that.

The news sent oil price surging back in the other direction and currently WTI and Brent are up 5% over 24 hours. There are, of course, some points to consider.

Throughout its history, OPEC has set production quotas that have never been adhered to. The two other global swing producers are Russia and the US. Russia has often spoken to OPEC about production cuts but nothing has ever eventuated. There is no way the US would get into bed with OPEC. Not after what happened in the seventies.

Indeed, if OPEC does actually cut production and oil rises back above US$50/bbl, more idled US shale oil rigs will be swung back into action. And can anyone see Putin agreeing to cut production if the US does not?

But, maybe it’s all a step in the right direction. OPEC economies are bleeding, including that of Saudi Arabia. We’re never going to see an oil price back in triple digits in the foreseeable future, but at least we won’t see US$20/bbl.

The Dow was down 50 points early in the Wall Street session when the OPEC news hit the wires. Investors piled back into the Exxons and Chevrons of the world and a hundred point rally was achieved by the close.

In other news, US durable goods orders were flat in August after a strong July, beating expectations of a 1.5% drop. But taking out lumpy transport orders left a 0.4% fall.

Deutsche Bank has announced it will sell its insurance business, as a means of shoring up its crumbling balance sheet. Deutsche shares jumped 3%.

The Deutsche Bank news is interesting, as it raises a structural question with regard banks across the globe. Bank analysts in Australia have for a long time been suggesting that perhaps the simplest way for Australian banks to satisfy new capital requirements in a world of stricter regulations and low earnings growth is to sell off their wealth management and life insurance businesses to wealth managers and insurers, and stick to good old fashion banking.

It’s hard to argue, given life insurance in particular has been an unwanted drag on already tepid bank earnings.

Commodities

West Texas crude is up US$2.22 or 4.9% at US$47.16/bbl.

If we take the view that stronger oil prices are positive for global growth, we might see why all base metals were up last night, although only lead exceeded a 1% gain.

Iron ore fell US30c to US$55.90/t.

The US dollar index is down slightly at 95.39 and gold is US$5.60 lower at US$1321.40/oz.

Stronger oil prices have pushed the Aussie up 0.3% to US$0.76.90.

Today

The SPI Overnight closed up 41 points or 0.8%. Watch that energy space.

The US June quarter GDP result will be once again revised tonight. Economists are expecting a slight improvement.

There is another round of ex-divs on the local market today and Aristocrat Leisure ((ALL)) will provide an investor briefing.
 

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