On Monday morning there was a lot of oohs and aahs to be heard as WTI looked as though it was not going to go back above US$50 per barrel.
Since breaking down through US$50 on April 23, it had cracked that level three times to the upside but, as the old wisdom has it, if a price level fails for a third time, it’s not a good one. There followed a rumble down to the US$47.75 area and then, yesterday, somebody kicked the bucket out from under the black stuff and it closed the day at US$45.52. Overnight the selling has gone on and at the time of writing WTI is marked at US$44.20 and Brent is at US$47.15.
So what’s gone wrong or, if you’re a driver of a gas guzzler, right? Oil has always been a bit of a tricky customer due to the near impossibility of ever getting demand and supply into equilibrium. For the past decades Saudi Arabia has always been the “swing producer”, which did its best to increase and decrease its own supply to the global markets to maintain some kind of equilibrium from the production end of the equation. The huge decline in the price from the US$100/bbl has, however, put some serious pressure on its fiscal position. With most producing nations having spent money as though the price would never fall again and all of them in dire need of cash at any cost, there followed a race to the bottom. This was supposed to have been dealt with at the grand Opec meeting in Vienna at the end of November, when all the members, along with some non-members, solemnly swore to cut back output for the greater good.
I wrote on November 30 about that agreement but questioned how many production cuts and quota agreements had been announced since the beginning of the century and how many of them have been kept.
Some smart analysts have pointed out that the agreed limits were to production and not to exports, which in turn meant that members could, quite legitimately, sell from stocks without breaching the agreement. There is of course the demand side argument that is largely based on fostering disbelief in China’s official GDP figures and assuming that demand from the Middle Kingdom is in reality lower than an extrapolation from the published economics stats would suggest.
Whatever the cause, the oil trading community went long in November, has at best made nothing out of it and might now not only have capitulated but flipped over, doubled down and gone short. It is too early to assume that hitting the bid intraday is going to be converted into core short positions but the price action of today and the early part of next week might give us a few clues.
JOBSWORTH
Ahead of this, of course comes today’s US nonfarm payroll for April. Bearing in mind that the 98k reported for March took all and sundry by surprise, the Street will be looking either for a hefty revision to what had been thought to be a statistical aberration or a juicy April figure. Average monthly job creation during the past year has been 185,000 and Street consensus for April is 190,000, reflecting the FOMC’s opinion that everything is ticking along just fine and with no expectations of imminent fireworks. If I were a trader, which I’m not, I’d probably choose to go into the number a small long of risk assets having taken a few chips off the table in morning trading and a small short in rates.
Last night saw the putative demise of the Affordable Care Act in the House followed by some rather unedifying scenes of Trump and the Trumpettes high-fiving and partying in the White House rose garden. The 217 to 213 vote wasn’t exactly as resounding as the president’s victory speech would have had one believe and the chances of the repeal receiving senatorial confirmation are as good as zero. The logjam has not been broken and the president’s problem with a recalcitrant Congress is, by all accounts, getting worse not better.
The US reporting season is now all over bar the shouting. Results have been astonishingly good and, despite the pressure from recent developments in commodities, the energy sector has been the great deliverer of results. They say of the Isle of Skye that if you can see the horizon it’s going to rain and if you can’t see it, it is raining. There’s a lot of that around in the equity markets too. Earnings might be good but they’re bound to turn south soon. That might be true but at the moment cashflow is strong and dividends are secure. A tax holiday and a repatriation of retained overseas earnings along with a cut in the corporate tax rate will bolster that observation. The worst case scenario is the status quo. I rest my case.
FRENCH CHEESE
Emmanuel Macron’s anointment on Sunday is a done deal – as it effectively has been since the éclat of Penelopegate – so as of Monday France will have a president with no party and next to no experience. Politics is not a computer game that can be won with hand/eye coordination and it is also not an algorithm that “new-think” seems to believe is the solution to all the world’s problems. Politics is a matter of networks, loyalties and lots and lots of horse trading. Macron, as nice a guy as he may be, has none of this on either a domestic or an international level.
Marine Le Pen predicted in the TV debate that as of next Monday France will be ruled by a woman; it will be either her or it will be Angela Merkel. In the nicest possible way and with all due respect to young Macron, she might not be entirely wrong. The broadcast media here keep harping on about French voters having collectively rejected the political establishment and the rise of a new political order. Rubbish! Had François Fillon not shot himself in both feet, he would have stormed through the pack and then taken the presidency at a gentle trot. Macron might be an alternative part of the establishment but he is still very much part of it . If you don’t believe it, wait until he begins to appoint the government.
But do we go into the Macron parade long, short or flat? For choice I’d probably, having seen the markets bought to buggery on rumour, now tend to consider selling on fact albeit with a view to getting long again at lower levels.
MAY POLLS
In the UK there have been local elections, which were on the docket long before Theresa May called the general parliamentary ones. First results – it’s all very manual and very slow – predict UKIP being entirely wiped off the map and Labour taking a very serious drubbing. At the time of writing UKIP has lost every seat it had on local councils and the Liberal Democrats have not made any of the gains they had hoped for. In Scotland they do not start counting until this morning. It would be fatuous to draw too many conclusions from last night’s poll for the June 8 general election but, to be sure, the prime minister will not be having a sleepless night. UK markets, in as much as they care for council elections, should like what they see.
Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. Here in Britain we are digesting the news that Prince Philip, the Duke of Edinburgh, is to retire at the age of 95. How lucky was he that he did not work for an investment bank, especially a North American one, which would have consigned him to the scrap heap as past his sell-by date some forty or so years ago when he was in his early fifties. Either that or they would have put a donut in his bonus envelope for being politically incorrect and for speaking his mind. The vast majority of people who were born the year he took the job are by now already retired and drawing pensions. Sadly for him, he’ll still have to set the alarm clock for the missus….