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Market Update

Oil Grabs Market Attention as Inventory Levels Remain High

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June 21, 2017

(Wednesday Market Open) Oil is the big story again in the early going today as traders await the influential weekly crude stockpiles report, expected later this morning, out of the U.S. Energy Information Administration.

Analysts and traders are widely expecting a pullback of some 2 million barrels in crude stockpiles. The private American Petroleum Institute’s report, out late yesterday, showed a 2.7 million decline in crude inventories, which appeared to help stabilize, at least somewhat, prices ahead of today’s market open. But remember, those numbers are not always in sync with the government’s reports.

By yesterday’s close, oil prices had slumped more than 2% and had trounced 52-week peaks by some 20%. That officially put crude into bear market territory, which is marked by a drop of at least 20% from a recent high. Ahead of the market open, crude oil prices were stabilizing. Market speculation appears to see more declines ahead and, if prices fall below $44 a barrel that might start affecting earnings in the energy sector, among others. (See below.)

The markets were struggling at the open to avoid heading toward the second straight day of declines, possibly marked by the recent selloff in oil, or maybe just the overall summer trading slowdown. The S&P 500 Index (SPX) was slumping in the early going and it will be interesting to see if it can snap that before the market closes.  

Investors might also want to keep an eye on today’s release of existing home sales by the National Association of Realtors. Remember that April’s results dipped lower than expected by 2.3% amid what the group called “stubbornly” low supply levels of housing.

A second straight downturn might spell trouble for growth in the nation’s gross domestic product (GDP), which, in turn, may provide more fodder for the Federal Reserve to chew on when debating the next interest-rate hike.

For the most part, economists have speculated that there will be a month-over-month fallback in estimates, but it’s the depth of that decline that might make the biggest difference in how prices play out today.

And then there’s the directional impact on the Federal Reserve’s well-stated plan to raise interest rates at least one more time this year for the trifecta. Federal Reserve Bank of Chicago President Charles Evans told a gathering of Wall Street Journal reporters yesterday that waiting until the end of the year to decide on raising rates again was a possibility.

He noted that the Fed has had “too many experiences” of being disappointed that inflation fell short of the Fed’s 2% target. “We can wait a little bit,” he told reporters. CME’s FedWatch tool, which charts probabilities of Fed Funds target rates based on Fed Funds futures contracts, is siding with him on waiting. There’s about a 13% probability that the Fed will raise rates again by September and a slightly more than 40% chance it will do so by December.

Crude Oil

FIGURE 1: CRUDE OIL ENTERS BEAR TERRITORY

Crude oil, tracked through Tuesday on the thinkorswim® platform from TD Ameritrade, ended the session in bear territory after settling in a nine-month trough, diving more than 20% from its 52-week high. Data source: CME Group. For illustrative purposes only. Past performance does not guarantee future results.

Oil Below $44 a Barrel: Typically, two weeks ahead of the 4th of July is a high-driving period in the U.S., a time when oil inventories are falling because so many people are taking road trips. But this year appears to be different for a bevy of reasons, one of which has been the crazy weather—unbearably hot in some areas of the country, chilly and rainy in others—that appears to be keeping summer trips at bay.

Another possible underlying issue is how long OPEC will keep its commitment to curtail production at a time when global demand is weakening and competition from the U.S. and Canada, among others, is adding to inventory. Oil prices have been trading in a $45-$50 a barrel for some time now, and if they start falling under the $44 a barrel level, the next support level will fall to $40.

NASDAQ Energy Director Tamar Essner, for one, sees more leveling off ahead. “I think the market goes lower from here before we go higher,” she said on CNBC this morning. “The market is trying to test OPEC’s resolve,” she said, “and to assess just how price sensitive” oil is.

Investors may want to keep an eye on that because lower price can then affect earnings in the energy sector. Although consumers may like oil prices below $50 a barrel when they’re pumping gasoline into their tanks, there comes a point when low prices on oil starts to affect the economy. Remember, anything that affects earnings is something to pay attention to; anything that doesn’t is usually just background noise.

Online Grocery Shopping? The surprising news that Amazon (AMZN) is bent on bagging Whole Foods for a $13.7 billion price tag has jarred bricks-and-mortar grocery-store retailers who now fear they are the next group of merchants to lose out to online shopping. But retail analysts NPD Group pointed out Tuesday that only 7% of U.S. consumers are clicking their way down grocery store aisles. The other 93% want to pick out their own fresh items and note that walking the aisles reminds them of things to buy that they may have forgotten.

Uber CEO Resigns: It’s an interesting human-interest story that Travis Kalanick, the force behind ride-sharing company Uber resigned amid a shareholder revolt. But does it matter to the markets? Apparently not, as the battered technology sector had little reaction to the news. Remember Uber is not publicly traded and is not likely have an impact—except to create more background noise—to whether the markets can wake up from the onset of a summer slumber. Happy First Day of Summer.

Good Trading,
JJ
@TDAJJKinahan

Economic calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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