Oil prices start the climb once again but the power is in OPEC’s hands

Commodities

Prior to OPEC’s November meeting, prices are on the rise – but their trajectory relies on the cartel’s response.

Oil trading

Oil prices restart upward trajectory

Even with the background of the COP26 talks, and governments coming to save the world, crude oil prices start the week in a sprightly mood.

Gains were capped last week on US supply concerns and the perceived market threat of a new Iran oil deal. Moving onto Monday and Tuesday, both WTI and Brent benchmarks were in the green again.

West Texas Intermediate futures closed Monday at $84.86 and is currently trading for around $84.27.

Brent Crude showed similar performance, ending Monday’s session at $84.50. As of Tuesday morning, Brent futures were trading for around $85.09.

Goldman Sachs has changed its oil price outlook once again. The investment bank is now betting on an $100 per barrel price of WTI by the end of 2021.

It presents an interesting dichotomy between global government plans and perhaps a stark vision of where the world actually is regarding fossil fuels. At COP26, world leaders are stressing the urgent need to move away from hydrocarbons.

But with figures like President Biden coming out and asking Russia and OPEC+ to give more crude to “help the American working class”, there’s a bit of disparity between fantasy and reality.

OPEC-JMMC meets on Thursday

OPEC and allies are back for another set of talks on Thursday 4th November as important customers plead for more crude.

Markets weren’t expecting any changes from the 400,000 bpd per month increase the cartel has been sticking to across 2021. However, a Reuters survey showed OPEC+ members delivered an extra 190,000 bpd in October, falling short of the target.

According to Reuters, this was due to local outages in some of OPEC’s smaller constituents offsetting higher output in Saudi Arabia and Iraq.

As such, we might see an extra bump in OPEC+ output in November to cover the deficit.

Let’s be clear: if any increase in oil production does come, then it will be because of OPEC internal discussions – NOT outside pressures.

The cartel has made it abundantly clear to commentators like Biden that it will only raise output on its own terms.

Frankly, it’s a bit naïve of Biden to use the “American working class” and comments about US citizens unable to drive to work as an attempt to shift the emotions of OPEC members and allies. Why would Russia, for example, care about the plight of working Americans?

Either way, the cartel appears happy to keep its output restricted. Prices are still high and look like they’re travelling upward again. It’s horses and carts for the US working class, I’m afraid, if you believe Biden’s rhetoric.

US oil supplies raise eyebrows in Washington

US crude oil stockpiles rose by 4.3 million barrels in the week ending October 22nd, according to the EIA. However, throughput at the Cushing, Oklahoma depot dropped dramatically. Something’s not right here.

There are millions of barrels of crude sitting in storage across the United States but it’s apparently not reaching consumers. Perhaps this is why Biden is so dogged in getting OPEC and its allies to loosen the taps a little more.

At 430.8 million barrels, US crude oil inventories are about 6% below the five year average for this time of year.

Despite this, crude oil imports were up in the same period. Over the previous four weeks up to October 22nd, crude oil imports averaged about 6.3 million barrels per day, 15.2% more than the same four-week period last year.

Something’s rotten in the heart of the United States’ oil infrastructure.

One possible solution would be for the US to get its own house in order. More production facilities could be bought online. Of course, this is no easy thing. It’s not as simple as just flicking a switch.

Despite this, Baker Hughes reports that rig counts are up for the fifteenth consecutive month in October. There are now 444 operational US oil rigs – an 84% increase over this time last year. Never mind OPEC, Mr Biden, get your own taps flowing.

Demand outstripping supply drives oil price action

Commodities

Supply and demand is such a simple concept – but it’s one that continues to have the biggest influence on current oil prices.

Oil trading

Another strong opening for crude oil

At the start of the week, the WTI and Brent Crude benchmark were trading at strong levels. This has been the case for some time now, so it’s not surprising to see, but for oil bulls it will no doubt be encouraging.

WTI, for example, was trading for $85.59 at its highest on Monday. It has subsequently fallen back to $83.65 on Tuesday morning, but still an overall strong position for West Texas Intermediate.

Brent has been a little more subdued but is still in a good place. The North Sea benchmark reached an on-the-day high of $85.76 on Monday. As of Tuesday, Brent futures were trading for around $85.08.

What’s driving price action this week? It’s the same old story: supply and demand.

Demand appears to still be in front of demand.

For example, supplies at the Cushing, Oklahoma depot are at three-year lows, suggesting higher throughput and less stockpiling.

US commercial inventories decreased by 0.4m bpd according to the EIA stockpile report for the week ending October 15th. They are now 6% lower than the five-year average in total.

Gauging the crude oil demand outlook vs supplies

We’ve seen much agitating from the Biden White House to try and get OPEC and allies to bring more crude to market.

Saudi Arabia, the current OPEC+ head honcho, is steadfastly refusing to do so. The world’s top oil producer is comfortable with the output levels it and its allies have agreed: an extra 400,00 bpd each month from now until April 2022.

But demand keeps on rising. The current energy crunch and possible heating switch from gas to oil is driving up forecasts. It’s estimated the global daily average could rise anywhere between 500,000 to 750,000 bpd heading into winter.

This is the basic price supporter going forward. There has been much talk of oil prices recently. Can they reach over $100? It’s a big question. Some ultra-bullish options traders are going even further, pricing in $200 per barrel oil prices by the end of December 2021.

That seems a little excessive to this reporter but there’s no doubt that oil prices are in a strong position right now.

However, there is also COVID-19 to contend with. The pandemic is by no means over. Rising cases in key crude importers could put pay to further travel and demand recovery. If the world needs to enter a second lockdown, how will oil demand cope? If that were the case, then it’s likely prices would slump.

Where next for oil? No rally lasts forever. It’s an immutable law of physics that what goes up, must come down. But while that’s talking about gravity, the weight of supply/demand could bring oil back down to Earth. Essentially, price action is all pegged to COVID-19 cases as it has been for the past nearly two years.

For now, however, oil continues to build on high demand and restricted supplies.

How to trade commodities

Commodities trading is a popular way to speculate on a wide number of different markets and assets. Here, we take a look at what it entails and how you can get started.

Commodities trading

What are commodities?

The term Commoditiesis a broad umbrella that covers many products that are pretty much essential to everyday living. In this case, it’s raw, naturally occurring materials that are then processed in thousands of different ways, before turning into products everyone uses in their daily lives.

Crude oil, metals, gold, crops, sugar and so on are all part of the commodities family. These raw ingredients are taken away and turned into food, energy, and clothing.

One thing that sets commodities apart from other tradeable products is pricing. There is a higher degree of standardisation on prices worldwide. It doesn’t matter who is producing the asset or material in question.

For instance, gold produced in a Russian gold mine or Brazilian gold mine would have the same price.

This does change from asset to asset, however. It’s not a hard or fast rule. For example, certain crude oil blends are priced differently using different benchmarks, such as Brent Crude or West Texas Intermediate (WTI).

Why do traders like commodities?

There are a number of reasons why traders like commodities.

  • Variety – With plenty of markets to choose from, traders can select to trade across a wide variety of markets.
  • Safe havens – Some commodities, like precious metals, are strong value stores. They retain their physical value – even in times of global economic turbulence.
  • Speculation potential – Prices of some commodities can be quite volatile. Just look at how oil has changed over 2020-2021 for instance. That means there is a lot of potential for high profits if you speculate correctly. However, this does mean you could lose more money too.
  • Hedging against inflation – Commodities’ value is not pegged to currencies. If a currency’s value falls due to inflation, then a commodity may hold its value in contrast. As such, many traders and investors use them to hedge against inflation.

Adding commodities to an investment or trading portfolio is also a great way to increase diversification. A diverse portfolio, in theory, is more insulated against the risks inherent to financial trading. If one instrument or asset, say equities, falls, then the commodities could help cover those losses.

What commodities can you trade?

We briefly touched on this earlier, but there are lots of different options available to would-be commodity traders.

Generally, commodities can be split into four categories:

  • Metals – This incorporates precious metals like gold and silver, as well as more common, industrial ores like iron, copper, nickel, and lithium.
  • Agricultural products – This category includes both edible and non-edible products. Wheat, grain, cocoa, and sugar are edible commodities. Cotton, palm oil, and rubber are examples non-edible commodities.
  • Energy – The energy market covers crude oil, gasoline, natural gas, coal, and heating oil. It also include renewable energy like wind power and solar.
  • Livestock – Cattle, hogs and other live animals fall under the livestock category.

What drives commodity markets?

Price action in commodities markets is defined by supply and demand. Generally, the higher the demand the higher the price and so on. Low supplies coupled with high demand can lead to high prices too.

We’ve seen this recently with oil markets. Crude oil output had been negatively affected by the COVID-19 pandemic. Demand was low and output was minimal. As of October 2021, demand is high, but output is being kept relatively scarce by producers such as the OPEC+ nations to protect prices.

However, commodities prices can be more versatile than other assets. This is because there are lots of factors at play relating to their production. For example, livestock levels may be impacted by health issues, such as foot and mouth disease. A bad harvest will impact wheat prices. Weather can affect production of commodities, such as a hurricane shutting down natural gas infrastructure in the Gulf of Mexico.

Global economic trends can affect prices too. China and India’s emergence as industrial powerhouses has caused the availability of metals like steel to drop off in other nations.

The above trends make commodities prices hard to predict. Prices can show high levels of volatility. As such, it can be seen as riskier than trading or investing in other assets. Remember: you should only invest or trade if you can afford to take any losses.

How are commodities traded?

Commodities are typically sold on exchanges, in the same way stocks are traded on exchanges. In fact, many would say the birth of trading as we know it started with 18th and 19th century merchants trading crops.

At Markets.com, we offer commodities trading through contracts for difference (CFDs). These allow you to speculate on commodity price movements without owning the underlying asset. These are leveraged products, which means you can take a position with only a fraction of the trade’s value. This means your profits can be amplified – but so can your losses.

There are also commodity exchange traded funds (ETFs). These group together a number of assets into a single basket. Some ETFs will hold the physical assets they’re cover, for example a gold ETF might hold a certain amount of bullion or coins. Some are more complicated and synthetically mimic their underlying market.

A Markets.com account will give you access to a wide range of commodity markets, as well as thousands other assets. Open yours today and start trading your way.

Stocks look heavy, Barclays down despite beat, Unilever rallies on prices

Morning Note

Caution is the order of the day…European stock markets fell moderately in early trade as the risk-on rally that powered Wall Street to fresh all-time highs ran out of steam overnight. Major bourses –0.5%, with the FTSE 100 under 7,200 again and the DAX under 15,500. The yen rose and Japanese equities fell, leading a broad decline in Asian equities overnight as Evergrande shares resumed trading and promptly plunged 13%. US futures are lower after the Dow Jones industrial average recorded a fresh all-time high and the S&P 500 notched is sixth daily gain on the bounce as investors looked through inflation and central bank fears to better earnings.

The Dow rose to a record intra-day high of 35,669.69, but finished the day 0.1% off its record close, gaining 0.4% for the session. As noted here recently, it might just be that the market has passed peak in/stagflation worries, even if the situation is going to be evident in the real economy for many months to come. Earnings are generally beating expectations – 84% so far according to FactSet. As commented on last night, growth is stalled – the Atlanta Fed’s Q3 GDP estimate is down to just 0.5% from +6% in the summer; inflation is running at +5% at least – German producer price inflation is running above 14%; and the yield curve is inverting, but ‘stonks’ just keep on rising. Rates flattish close to multi-month highs today – as noted yesterday there has been some mild steepening in yields, 2s/10s at 1.25%, 5s30s at 0.96.

Travel stocks are doing a little better in early trade with IAG, EasyJet +1% after posting sizeable losses yesterday as the UK signalled it could reintroduce some restrictions, whilst rising case numbers will make the country less accessible to many foreigners.

Oil is a little lower this morning after moving to fresh multi-year highs overnight – WTI just a shade under $84, Brent hitting $86 a barrel. US inventories were bullish with big draws for distillates and gasoline. Global inventories still falling, India is again calling on OPEC to pump more. Reports indicate Exxon is debating abandoning some of its biggest oil and gas projects.

Tesla earnings beat expectations, but the stock fell. Insiders have been selling the stock ahead of the earnings release, which maybe tells you something. EPS rose to $1.86 vs $1.59 expected on a record revenue quarter. gross margins improved – 30.5% for its automotive business and 26.6% overall. Vice president of vehicle engineering Lars Moravy struck a more conciliatory tone about the NHSTA than his boss: “We always cooperate fully with NHTSA.”

Unilever products are just about everywhere in just everyone’s homes. So, when they raise prices it usually affects a lot of people. Unilever raised prices by an average 4.1% in the third quarter across all its brands, helping it to achieve underlying sales growth of 2.5% despite sales volume declining 1.5%. Turnover rose 4%. The company said it is taking action to “offset rising commodity and other input costs”. Share rose over 2%, delivering a boost to the FTSE 100.

Barclays said profits doubled in the third quarter as a strong performance at its investment bank and further reduction in Covid-era impairments boosted earnings. Attributable profit rose to £1.45bn, up from $611m for the same quarter last year. Return on tangible equity returned to a more normal 11.9% from the 18.1% in the previous quarter. Provisions for loan losses fell to £120m as the economic recovery continues to ease pressure on banks.

CEO Jes Staley touted “the benefits of our diversified business model” as Barclays posted its highest Q3 YTD pre-tax profit on record in 2021. Pre-tax profits at the investment bank rose a mighty 51% to £1.5bn, well ahead of expectations. Staley also pointed to consumer recovery and better rate environment. But does Barclays get enough credit for the investment bank earnings? Despite driving the performance in a fashion similar to some of the big Wall Street beasts it seeks to emulate, shares continue to trade at a hefty discount. Barclays trades at a price to book of about 0.5, whilst US peers are above 1, with BoA at about 1.5 and JPM closer to 2. But if investment banking revenues were not that sustainable and ‘can’t be counted on for future quarters’, why do it? Certainly they are more volatile quarter to quarter – revenues from equity trading, M&A and advisory fees cannot be counted on in the coming quarters to the same extent that mortgage fees and credit card fees might be. But discounting these entirely seems like a mistake by investors. Barclays rightly touts its more diversified revenue stream. When consumer and business growth markets are strained – like during the pandemic – volatility in financial markets creates a good environment for trading revenues to prosper. Barclays is reaping the benefits.

After a softer day on Wednesday, the dollar is a tad firmer this morning as risk is on the back foot. Yen also stronger. GBPUSD tests 1.38 support – daily candles suggest near-term top put in at 1.3830 area and maybe calling for pullback towards lower end of the rising channel. Hourly chart points to declining momentum. Test at 1.3740 for bulls.

GBPUSD Chart 21.10.2021

Stocks rally, inflation sticks, earnings on tap

Morning Note

Stock markets rose in early trade as investors parsed the latest signs of inflation and the central bank reaction function, whilst earnings season has got underway across the pond with some decent numbers from JPMorgan. Wall Street rose mildly, snapping a three-day losing streak. VIXX is off sharply, which maybe reflects increasing comfort that the market has stabilised, if not able to make new highs just yet.

Earnings season gives investors a chance to ignore some of the noise and market narratives and get into actual numbers. Only this time we expect the corporate reporting season to underline the inflation narrative – the question is whether it’s just inflation or stagflation. Probably we get a bit of both – watch for sandbagging. JPMorgan numbers were positive, but as ever the stock fell despite beating on the top and bottom line. Profits were boosted by better-than-expected loan losses. Trading revenues were robust, asset and wealth management strong, loan growth improving and likely to pick up in 2022. Delta Air Lines also posted numbers that topped expectations including a first quarterly profit ex-state aid since the pandemic. But higher fuel costs and other expenses will hit the fourth-quarter profit – shares fell over 5%. Today sees Citigroup, Bank of America, Morgan Stanley and Wells Fargo report.

Chinese producer price inflation rose 10.7% in September, the highest level since 1996. The China PPI number is an important leading indicator for global consumer inflation. On that front, US consumer price inflation accelerated in September to 5.4%, with prices up 0.4% month-on-month. Core rose 0.2% from August, leaving prices ex-volatile items like energy and food at 4%. US PPI inflation today is seen at +0.6%, +0.5% for the core reading.

Minutes from the Fed’s last meeting indicated the US central bank is likely to commence tapering asset purchases next month. “Participants generally assessed that, provided that the economic recovery remained broadly on track, a gradual tapering process that concluded around the middle of next year would likely be appropriate,” the minutes said.

Post the CPI and FOMC minutes we see Treasury yields lower, the dollar lower, gold firmer. Lower bond yields lifted megacap growth, or at least provided some marginal buying excuse to do so. Inflation is still hot but not getting much hotter. Narrative has clearly exited team transitory to support team sticky. The question now is whether we are at peak in/stagflation fears and this allows the market to move on to start pricing for 12-18 months hence, by which time you’d feel a lot of the post-pandemic bottlenecks and pressures will have eased. The problem for this – still team transitory if you like – is that anything that raises the costs of getting goods from source to consumer is inflationary and the pandemic has certainly been that. But so too is the shift in globalisation trends, eg Brexit.

Sterling is firmer as the dollar weakened in the wake of the CPI report. GBPUSD has broken free of the trend resistance and with bullish MACD crossover in play. Bulls would like to see the previous two highs on the MACD cleared (red line) to confirm reversal of the downtrend since May.

GBPUSD Chart 14.10.2021

Chart: Dollar index easing back to the middle of the channel, but faces pressure from bearish MACD crossover.

Dollar Index 14.10.2021

Yesterday I noted that gold was likely to face some volatility and break free from its recent consolidation. CPI numbers were indeed the catalyst and we saw gold prices hit the highest in a month, approaching $1,800 before pausing. Near-term, consolidation again with the 1hr chart showing a clear flag pattern with the lower end capped by the 23.6% line.

Gold Chart 14.10.2021

Chart showing gold price movements on 14.10.2021

Oil has firmed, with WTI recovering the $81 handle, though price action remains sluggish and sideways for the time being. OPEC yesterday cut its global oil demand growth forecast for 2021 but maintained its 2022 view and cautioned that soaring natural gas prices could boost demand for oil products.

OPEC cuts its demand growth forecast for 2021 to 5.82 million barrels per day, down from 5.96 million bpd. As we noted some months ago, it was always likely that OPEC would need to trim its 2021 forecast since it had always backdated so much of that extra demand to come in H2. The original 6m bpd forecast implied 1m bpd in H1, 5m bpd in H2, which always seemed optimistic. Critically, though, it was not wildly optimistic – demand has come back strongly after shrugging off the summer Delta blues. The cartel maintained its 4.2m bpd growth forecast for next year. EIA inventories today – a day late due to the Columbus Day holiday – forecast 1.1m build.

Crude Oil Futures Chart 14.10.2021

Nat gas – holding the trend support and 20-day SMA, bearish MACD crossover still in force.

Natural Gas Chart 14.10.2021

Hays shares +4% as fees rose 41% from a year ago. Strong leveraged play on record numbers of job vacancies and staff shortages. Shares have been flat the last 6 months, though +17% YTD, +45% the last 12 months leaves not a lot of room left on the table.

Dunelm still performing strongly against tough comparisons. Total sales in the first quarter increased by 8.3% against a very strong comparative period in FY21, when sales grew by 36.7%. Gross margins were down 10bps and expected to be 50-75bps lower than last year for the full year. Management warned on supply chain problems and inflation but stressed that good stock levels should provide them some cover. Some way to go to for the shares to recover recent highs but encouraging signs.

Can crude oil prices make it to the triple digits this year?

Commodities

Oil prices are mounting a strong upward charge as the natural gas crisis rolls on. The question is how far can oil go?

Oil trading

A combination of factors sent oil prices skyward over the weekend. It essentially boils down to the state of inventories, supplies being kept in check, and demand recovering from the summer’s Delta variant COVID-19 wave.

Then you can factor in the global natural gas shortage. A big part of the support crude prices are getting comes from the gas crisis in the form of fuel-switching – or at least the idea of increased fuel switching.

Oil bulls believe that Europe and Asia could pick up more oil for their power demands this winter to compensate for tighter gas supplies. More oil use = more oil demand = oil prices.

“An acceleration in gas-to-oil switching could boost crude oil demand used to generate power this coming northern hemisphere winter,” ANZ commodities analysts said in a note published earlier in the week.

If this does occur, despite Russian President Putin saying he would step in and increase gas supplies to Europe, then fuel switching could be the catalyst that sends oil prices into three-figure territory.

However, JPMorgan analysts have said they’ve yet to see any evidence of a major oil-to-gas fuel change just yet.

A note from the investment bank said: “This means that our estimate of 750,000 barrels per day of gas-to-oil switching demand under normal winter conditions could be significantly overstated.”

So, under present circumstances, the market appears to be pricing in this shift, but it might not actually occur.

Crude prices were on a strong footing at the start of the week. As of Tuesday morning, WTI futures were trading for around $80.5.

Brent crude futures are exchanging hands for $83.83.

There was talk last week that the US would be dipping into its strategic reserve, which did cause prices to wobble. However, the Department of Energy has walked back on these claims. If anything, US inventories are going up.

Oil & gas infrastructure in the Gulf of Mexico, previously closed due to Hurricane Ida passing by, is back online. Rig counts are rising week-on-week. That means more US-sourced crude is being pumped into its domestic stockpiles. As such, there is no need to tap the nation’s strategic reserves just yet.

Crude inventories rose by 2.3 million barrels in the week to October 1st to 420.9 million barrels. Analysts were expecting a 418,000 drawdown.

Natural gas trading

The ongoing gas crisis was creating plenty of upside risk at the start of the week. However, it looks like traders were looking at improving US natural gas supplies for this week’s price action.

Warmer temperatures are playing heavily into the US 15-day weather outlook. Cold temperatures are departing from much of the US, and while unseasonable warmth is good for those who want to go out and about, it’s not so great for price action.

October demand could fall to its lowest for over forty years based on prevailing weather forecasts. It’s possible that the demand picture could extend into November too.

However, warm weather will help the injection situation.

The Energy Information Administration (EIA) reported last Thursday that domestic supplies of natural gas rose by 118 billion cubic feet (Bcf) for the week ended October 1st.

S&P Global Platts analysts were expecting a smaller 111 Bcf rise.

There is some way to go before stockpiles are in line with seasonal norms. Total stocks now stand at 3.288 trillion cubic feet (Tcf), down 532 Bcf from a year ago and 176 Bcf below the five-year average.

In terms of price action, Henry Hub futures were trading at $5.79 on Monday morning and looked like they were ready to challenge $5.80.

Prices pulled back to $5.40 across the Monday session leaving. They dropped further, roughly 2%, to $5.20, so last week’s major rally appears to be petering out. Where they go now seems tied in with US weather patterns. There’s still a gas shortage but as mentioned above, the focus is on what’s happening in the USA instead of Europe and Asia.

Stocks lower, rates on the move

Morning Note

Stock markets declined on Tuesday morning following on the heels of a wobbly session on Wall Street, with losses of around 0.5% for the broader European Stoxx 600. The FTSE 100 continues to chop in a sideways direction, trading just below 7,100 it is held firmly within the range of the last 6 months, whilst the DAX is back to the lower end of the recent range to test the 200-day moving average once more. Inflation worries persist, though our tradeable US natural gas and oil prices have edged back from the highs. Yesterday saw WTI rise above $82 for a fresh multi-year peak, before paring gains to take an $80 handle this morning. Coal prices in China meanwhile have risen to a new all-time high. Copper has rallied 7% this month, though it’s still ~10% below its May peak.

 

Rates are on the move again with the 10-year US Treasury note at 1.63%, a four-month high. The 2yr note yield also notched an 18-month high. Earlier we saw UK gilt yields spiked on markets believing the Bank of England could act early to tame inflation. The simple way of looking at this is higher energy costs = higher inflation expectations = early, faster central bank tightening. Later today we hear from the Fed’s Clarida and Bostic, whilst a 10yr bond auction in the US will be watched for demand. US CPI inflation numbers are due tomorrow.

 

On Wall Street, sentiment looked fragile as early gains reversed the market closed at the session low. The S&P 500 fell 0.7%, with similar losses for the Nasdaq and Dow Jones. Lots of churn, little real direction to this market right now until the macro picture on inflation and CB reaction function is better understood. Asian shares were broadly weaker as another deadline for Evergrande bond coupon payments has passed.  

 

EasyJet shares declined more than 2% despite sounding a confident tone over the reopening of the travel sector. The company reported Q4 headline losses decreased by more than half with positive operating cash generated. Management now expects a headline loss before tax of slightly more than £1.1bn. However, on a more upbeat note the company says it sees positive momentum carried into FY22 with H1 bookings double those of the same time last year. 

WTI: Finding support at the 23.6% retracement of the move up off the Oct 7th swing low.

Oil Chart 12.10.2021

GBPUSD: Pulling back from yesterday’s 2-week high, where it retreated from our trend line, now sitting on the 23.6% retracement of the Mar ‘20 to May ‘21 rally at 1.35950.

GBPUSD Chart 12.10.2021

Stocks climb but price action still choppy

Morning Note

Choppy: Stocks are firmer in early trade following yesterday’s losses. For all the movement we have seen, the FTSE 100 is tracking slap in the middle of its 6-month range. But now it’s facing near-term resistance from its 50-day and 100-day averages at 7,092/7,078, which seem to be capping any rallies at the moment, whilst the 200-day support at 6,913 is looking good for a retest. The DAX moved up more than 1%, or about 170pts, to around 15,150 as it looks to recover its 200-day moving average at 15,037. You are in ranges now where you feel it could break either way – as noted earlier this week you need to feel that the repricing for risk from a different macro outlook and rate environment (higher yields) has bottomed, that the valuations are looking healthier, earnings can deliver beats not misses and that we’ve passed peak inflation/stagflation ‘fear’ (if not the actual environment, which could last for many months).

Wall Street reversed early losses to rally on signs of progress on the US debt ceiling. The Dow Jones industrial average erased a drop of 400pts to end the day up 100pts. The S&P 500 rallied 0.4% as mega-cap tech rallied as bond yields didn’t really push on and investors thought they’re close to being oversold. But it’s still all rather indecisive. The S&P 500 continues to chop around its 100-day SMA and the 4,300 area. Futures are indicating higher with 10yr yields back down to 1.52% from 1.57% hit yesterday, the highest since June.

Senate Minority Leader Mitch McConnell said Republicans would back a short-term motion to raise the debt ceiling. “To protect the American people from a near-term Democrat-created crisis, we will also allow Democrats to use normal procedures to pass an emergency debt limit extension at a fixed dollar amount to cover current spending levels into December,” he tweeted.

ADP reported that private payrolls increased by 568k jobs last month, easily topping expectations. Allowing for the usual ADP caveats, this is a positive signal ahead of the nonfarm payrolls report on Friday – remember a key release ahead of the Fed’s November meeting re tapering.

Natural gas was the big story as prices spiked out of control in Europe/UK. US Henry Hub prices did reach a new multi-year high before reversing, apparently on comments from Vladimir Putin who said Russia would seek to stabilise the market and pump more gas. There is a lot going on there – political machinations aplenty and questions over whether much of the problems in the market have been Russia’s doing in the first place (weaponization of gas), but it did seem to cool the market. Prices are down 15% from yesterday’s $6.46 peak and now testing lowest in a week around $5.50 and possible bearish MACD crossover in the offing could signal a top.

Oil was weaker too as it also seemed to consolidate after extending the rally into overbought conditions – as highlighted on Tuesday. Inventories were mildly bearish too, rising 2.3 million barrels last week. The US said it was considering releasing oil reserves to cool prices – always a political hot potato in the US as much as in Europe. WTI is close to 5% below yesterday’s high at $76, possible test of near-term Fib and trend support around the $75.60 area.

Crude Oil Futures 07.10.2021

Talking of rising fuel costs, these are feeding into rising inflation expectations. UK inflation expectations topped 4% for the first time since 2008. A gauge of US inflation expectations has moved to its highest since June.

In FX, the euro made fresh YTD lows yesterday but is steadier this morning, with EURUSD back to 1.1560. Looking a tad oversold but the fresh low needs to mark a bottom soon or further selling can take off on another leg lower.

EURUSD Chart 07.10.2021

Soaring energy prices driving stagflation fears, yields up, stocks down

Morning Note

Inflation/stagflation, supply chain problems, the US debt ceiling, an energy crisis as natural gas prices soar to new records in Europe and the UK, tighter monetary policy from central banks, worries about the Chinese property sector – all swirling around equity markets this week and not going away any time soon. Chiefly this morning we might say that rising Treasury yields and soaring energy prices are conspiring to knock risk appetite.  

 

European stock markets declined by around 1-2% in early trade on Wednesday despite something of a Tuesday turnaround for the US. The DAX tumbled 2% and under its 200-day moving average as German factory orders declined 7.7% in August amid supply chain problems, a sharp decline from the 4.9% increase in July. Although some of the decline could be a reaction to big jump in July, it’s nevertheless pointing to a slowdown in activity. Motor vehicles and parts were –12%. Meanwhile the British Chambers of Commerce released a survey showing UK companies are deeply worried about inflation and supply chain problems, and it warned that a period of stagflation may be coming. Boris Johnson is due to speak later but I cannot believe he will instil much confidence. The ‘everything is fine’ meme springs to mind… The FTSE 100 fell by more than 1% to under 7,000, though still within its 6-month range.

 

Wall Street rallied on Tuesday, reversing some of the Monday slip. Mega cap tech rose, whilst energy also rallied again on higher oil prices with WTI approaching $80. Henry Hub natural gas rose to just about its highest level in 13 years, with yesterday’s 9% gain seeing the US contract on the Nymex close at its highest since Dec 2008. Treasury yields are higher again, with 10s at 1.570%, the highest since mid-June.  Soaring energy prices are pushing up inflation expectations, pushing up yields and weighing on stocks. The dollar is bit stronger this morning with EURUSD taking a 15 handle again and cable under 1.36. US futures are weaker to the tune of 1%, indicating another rocky session on Wall Street with the S&P 500 ready to test the 4,300 area again.

 

Tesco shares rose over 4% in early trade after raising its full-year outlook on a profit beat and initiated a £500m share buyback programme. The company said it expects full-year adjusted operating profit of £2.5bn-£2.6bn, about a £100m ahead of analyst expectations, after H1 adjusted retail operating profit rose 16.6%. The strong retail showing reflected UK market outperformance and sharp recovery of Booker catering, management said. Shares in Sainsbury’s also climbed more than 1% despite a soft session for the FTSE 100. 

 

The Reserve Bank of New Zealand raised rates for the first time in seven years, hiking the main cash rate by 25bps to 0.5%. The central bank warned that cost pressures are becoming more persistent and that headline inflation would rise above 4% in the near term. But it was confident that current covid-19-related restrictions ‘have not materially changed the medium-term outlook for inflation and employment’ and that the ‘further removal of monetary policy stimulus is expected over time’. 

 

Oil prices keep on rising with front month WTI approaching $80. APi figures showed inventories increased by 950k barrels for the week ended Oct 1st, vs expectations for a draw of 300,000 barrels. There were also builds for stocks at Cushing, distillates and gasoline. EIA figs today expected to show a build of 0.8m barrels. Small inventory builds in the US won’t really change the narrative.

 

Finally, Deutsche Bank has a note out today warning about the impact of the shortages in the UK economy, which are beginning to ‘bite’ in the manufacturing sector – important for exports and therefore the currency. “In the medium-term, shortages in sectors like manufacturing should mean that UK suffer from a (relative) fall in output and have to be replaced by imports from abroad, weakening the current account and the pound,” they say. GBPUSD trades noticeably weaker today but it’s more a dollar move after a decent recovery over the last 4 sessions and with EURUSD also moving to its weakest since last July.

GBP USD Chart 06.10.2021

 

EURUSD Chart 06.10.2021

Oil surges to seven-year high on OPEC+ decision

Commodities

OPEC and allies commit to production increases sending prices on a strong upward trajectory.

Oil trading

The week’s big news is the oil price boost afforded by OPEC+’s output increase.

The cartel and its allies met virtually on Monday to discuss the state of play for its production volumes. It unanimously decided to stick with increasing output by 400,000 bpd in line with its tapering plans.

There had been some talk of OPEC+ pushing for an 800,000 bpd increase in November, with no increase to follow in December. That isn’t the case. There is a tricky tightrope to walk for the cartel regarding supply and demand, after all.

Oil jumped on news that more OPEC+ output is coming. WTI, for instance, is trading at seven-year highs with futures at $77.87 and spots at $77.70.

Brent broke above $80 on the news. At the time of writing, Brent crude futures had reached $81.69, gaining 0.48% on the day. Brent spots showed similar on-the-day growth and were trading for $81.47.

On the one hand, OPEC+ has acted to protect prices. Another argument is that there is actually not enough room to grow production further at this stage. While Saudi Arabia and the UAE have increased their export volumes by 1.9m bpd 2021, for instance, other OPEC+ members have actually seen theirs drop.

US President Joe Biden was keen for OPEC+ to expand production even further. Roughly 30m bpd of production has been affected by Hurricane Ida. While the reopening of US shale infrastructure in the Gulf of Mexico is underway, Biden was hoping OPEC+ could plug the gap.

That’s clearly not the case here. Instead, OPEC+ is treading the same cautious path it has been walking for the length of the pandemic.

Baker Hughes reported a rise in rig counts for the fourth consecutive week on Friday. Rigs rose by 7 to 528 in the week ending October 1st – the highest level since April 2020. Many Hurricane Ida-hit facilities are starting to come back online, hence the increase.

Looking to US inventories, we saw a major increase EIA figures in the week ending September 24th. US commercial crude oil inventories increased by 4.6 million barrels from the previous week.

At 418.5 million barrels, US crude oil inventories are about 7% below the five-year average for this time of year.

Natural gas trading

Natural gas dropped on Friday, but as of Monday had started to make strong gains again. At the time of writing, Henry Hub futures were up 4.11%, trading at around $5.77.

The march towards $6.00 is back on.

Supply constraints remain in Europe and the UK and China is apparently hellbent on sucking up every last ounce of LNG it can get its hands on. Even Russia has begun tightening levels heading to Europe. It’s going to be a tricky couple of months in terms of supplies.

Bad for consumers? Most likely. Good for bullish traders? Possibly.

Last week’s EIA storage report triggered a broader sell off with traders feeling bearish.

Working gas in storage was 3,170 Bcf as of Friday, September 24th, 2021, according to EIA estimates. This represents a net increase of 88 Bcf from the previous week. Stocks were 575 Bcf less than last year at this time, and 213 Bcf below the five-year average of 3,383 Bcf.

Price action towards the end of last week indicated the presence of strong short-term sellers.

Looking to weather, in the short-term, US national demand is trending towards very low levels, according to Natural Gas Weather.

The weather service said “A messy pattern continues as numerous weather systems again impact the US this week. One system is over the Northwest, a second tracking into the Southwest mid-week, and a third extending from the Great Lakes to the South and Southeast.”

There are reports of tropical storms and hurricanes swirling over the Atlantic. Should we be looking at another Hurricane Ida, then US infrastructure could be about to take another big hit. Supplies would get even tighter.

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