Oil & gas stage major surge

Commodities

Crude oil and natural gas are off to a flying start this week with market conditions perfectly aligning to create strong price action.

Oil trading

It’s been an exceptionally good couple of days for oil prices.

The key WTI and Brent Crude benchmarks are heading in one direction as they carry on the momentum built up over the weekend.

As of Tuesday, WTI had passed $76.33, making 1.1% on the day, and continues on its upward trajectory.

Much can be said of Brent. The North Sea benchmark is aiming to break the $80 level. At the time of writing, Brent futures were trading for around $79.47 after making 1.15%.

Why the rally and why now? It’s a combination of tighter global supplies, trader confidence, and strong American Petroleum Institute (API) numbers. The three together have created a perfect price storm, hence the strong price action we’re currently seeing.

Firstly, it looks like energy markets are the place to be right now for traders. They appear to be pushing these new highs and are confident in the market’s overall strength.

The API’s inventories report from last week helped underpin this market confidence too. The US has long been a bellwether for oil demand – it is the world’s largest consumer after all – which makes numbers from the API or EIA particularly useful.

The API reported a 6.108m barrel drawdown for the week ending September 17th. Market estimates forecasted a decline of 2.4m.

As the US economy opens up, energy-intensive industries are starting to roar back to life, hence the higher-than-expected drawdown. It’s much the same story in developed economies worldwide as they look to return to post-pandemic normality.

As winter heating season approaches, and supplies tighten, we’re possibly going to see oil prices remain strong as temperatures drop.

Goldman Sachs is feeling particularly confident, having revised its year-end price targets up to $87 for WTI and $90 for Brent.

Goldman said: “While we have long held a bullish oil view, the current global oil supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast and with global supply remaining short of our below consensus forecasts.

“The current oil supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast and with global supply remaining short of our below consensus forecasts.”

Price action is still very much a tightrope act. With the news that US Shale is ready to start drilling, and could add up to 800,000 bpd to supplies, the supply/demand balance could be upset.

Natural gas trading

If you thought crude oil was in a strong position, wait until you see natural gas.

Natural gas prices rose sharply on Monday to reach close to yearly highs at $5.30 before soaring to an unprecedented $6.13 on Tuesday morning.

A squeeze on supply caused by Hurricane Ida is offering support in the US. A large chunk of Gulf of Mexico and Southern US infrastructure is still closed for repairs or maintenance, lowering supply levels, after being hit by Ida earlier in September.

Let’s be clear: this is a global phenomenon. Simply put, there isn’t enough natural gas currently to satiate demand.

Prices of utility gas are skyrocketing in the US, EU, and UK as well as in Asia where demand is intensifying.

Switching back to the US, we should be in the midst of a sustained inventory build-up. It’s injection season – the period where more gas is squirrelled away in anticipation of high winter demand. However, it appears that

The latest Energy Information Administration (EIA) data showed a build-up of 76 billion cubic feet (Bcf) for the week ended September 17th. This was higher than the expected 70 BCf – but stocks remain some 598 Bcf lower than this time last year.

Looking at short-term weather-driven demand, Natural Gas Weather reports: “National demand will remain light this week as highs of 60s to 80s rules most of the U.S. and with very little coverage of highs into the 90s. Overall, national demand will be low to very low into the foreseeable future.”

Week Ahead: Is Santa Claus coming to Wall Street?

Week Ahead

In a two-week special edition of the usual week ahead, our attention turns to the stock market’s usual end-of-year bounce. Will the traditional Christmas-time rally hit wall street? Or will November’s strength eat into any potential December gains? We also take a look at oil & gas stocks in the run up to the new year. 

Is a Santa Rally coming to Wall Street? 

It appears the major indices had a bit of a bumper November. The Dow Jones chalked up its best month since 1987; Euro Stoxxx 600 enjoyed its best month since record began; the FTSE 100 rallied 12% for its best month in 31 years; Value Rotation set up the Russell 2000 for its best month on record. All very well and good for November, but does this mean a Wall Street Santa Rally is off the cards? 

Valuations are stretched with the S&P 500 Shiller Cape PE ratio at >33x. That’s double the historic 17x average. Additionally, forward PE multiples or >21x for the index are also quite stretched too. 

Additionally, the Bank of America Fund Manager Survey last week flashed a sell signal with cash balances falling to 4% of investor portfolios. 

Couple this with Goldman Sachs sentiment indicators registering +2.0 standard deviations above average, then the outlook for a Santa Rally isn’t particularly great. A reading this high tends to create headwinds for equity markets in the 1-4 weeks after, which may be bad news for markets this December. 

But there are reasons to be jolly. If a Brexit deal is struck, and the US passes a Covid stimulus package, then, combined with strong vaccine takeup investors could take a more bullish view of December’s markets. 

As ever, the signals are a bit mixed, so the only thing to do is wait and see. Maybe Santa and his reindeer will make it to Wall Street after all. 

Brexit 

With or without a deal, the UK is set to leave the transition period of its exit from the European Union on January 31st. Market participants will closely watch for upcoming data for the impact on the UK economy and a possible policy response from the Bank of England. At the time of writing there was no clear sign of whether the UK and EU would agree to a trade deal, though markets remain broadly hopeful that the two sides can come together. 

Oil & natural gas inventories

With a relatively quiet data calendar over the Christmas period the weekly oil and natural gas inventories will be among the most closely watched high frequency economic indicators for traders to watch.  

In a world where oil demand has sunk massively, but with a late optimistic upswing over the past couple of weeks, it has been less than stellar for oil producers. 

Natural gas hasn’t had as bad a time as oil, but there are indicators the future may not be so rosy. President-elect Biden’s green vision may have a big impact on natural gas demand going forward, as the US looks to renewables to secure its electricity generation future. 

OPEC is taking a cautious route if its recent moves are anything to go by. And that’s fair enough, given the year its members have endured. While it has given the go-ahead to raise production volumes by 500,000bpd, it has lowered its oil demand forecast for next year. It has dropped its estimations by 410,000bpd, with new oil demand figures at 95.89m bpd. 

This feeds into higher storage numbers in US oil. The EIA reports over 2m barrels were added to its stocks in the week commencing December 11th. People aren’t travelling, so fuel demand is low, pushing stockpiles higher.  

Could vaccines give oil a release next year? It’s possible. The US has begun vaccinating frontline workers, and the UK is about two weeks into phase one of its rollout programme at the time of writing. Logically, if more people are up and about, travelling, and back to work, thanks to vaccines, then oil demand should rise too. 

Natural gas, though, has another problem oil doesn’t always suffer from: the weather. Temperatures in key markets are some of the warmest on record, which means consumption of gas for heating is lower. If warm temperatures persist through the winter, then prices could fall in line with smaller domestic and business demand. 

Webinars to watch

As the year comes to a close, Mark Leigh rounds off 2020’s series of free webinars. He will return in 2021 with more educational insights and trading tips but be sure not to miss any of his webinars in the coming two weeks. Highlights include: 

Introduction: How the Business works and Where do you Fit in 

Tuesday 22nd December – 4.30pm GMT 

This overview is designed to give a sound and clear understanding of how the market works and how money is made and lost as a currency trader. Realistic goals and expectations. How the market works in relation to your trading business. Moving the odds into your favour and control the level of risk. 

Sign up 

FXtrademark has a Proprietary Scorecard System for every Trade Setup 

Wednesday 23rd December – 4.30pm GMT 

Learn to use the FXtrademark scorecard where you will score each trade set-up on a scale from 0 to 10 based on predetermined criterion. This system will allow you to trade with a system and a plan as opposed to making arbitrary decisions based on emotions. 

Sign up 

Mark Leigh’s Trader Clinic 

Monday 28th December – 4.00pm GMT 

See how a professional uses the ups and downs of trading to hone their strategy and improve their returns with our Trader Clinic. Join Mark Leigh as he demonstrates the procedure he uses to evaluate his winning and losing trades and build a better strategy. 

Sign up 

Ten Trading Rules for Every Level of Trader 

Thursday 29th December – 4.30pm GMT 

Trading is not an exact science, the markets are live and often unpredictable, that is why you need a set of rules as a basis for making educated and calculated trading decisions. 

Sign up 

Major economic data 

Date  Time (GMT)  Currency  Event 
Mon 21 Dec  12.30am  AUD  Mid-Year Economic and Fiscal Outlook 
       
  3.00pm  EUR  Consumer Confidence 
       
Tue 22 Dec  9.30am  GBP  Final GDP q/q 
       
  1.30pm  USD  Final GDP q/q 
       
Wed 23 Dec  1.30pm  CAD  GDP m/m 
       
  1.30pm  USD  Core PCE Price Index m/m 
       
  1.30pm  USD  Personal Spending m/m 
       
  Tentative  USD  Treasury Currency Report 
       
  3.30pm  USD  US Crude Oil Inventories 
       
Thu 24 Dec  1.30pm  USD  Core Durable Good Orders m/m 
       
  1.30pm  USD  Durable Goods Orders m/m 
       
  1.30pm  USD  Unemployment Changes 
       
  3.30pm  USD  Natural Gas Storage 
       
Tue 29 Dec  3.00pm  USD  CB Consumer Confidence 
       
  Tentative  USD  Treasury Confidence Report 
       
Wed 30 Dec  8.00am  CHF  KOF Economic Barometer 
       
  2.45pm  USD  Chicago PMI 
       
  3.30pm  USD  US Crude Oil Inventories 
       
Thu 31 Dec  1.00am  CNH  Manufacturing PMI 
       
  1.30pm  USD  Unemployment Claims 
       
  3.30pm  USD  US Natural Gas Inventories 

 

Key earnings data 

Date  Company  Event 
Mon 21 Dec  HEICO  Q4 2020 Earnings 
  Factset Research Systems  Q1 2021 Earnings 
     
Tue 22 Dec  Cintas Corp.  Q2 2021 Earnings 
  CarMax  Q3 2021 Earnings 
     
Wed 23 Dec  Paychex  Q2 2021 Earnings 
  Vontobel  Q2 2021 Earnings 
     
Fri 25 Dec  Nitori Holdings  Q3 2021 Earnings 

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