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Oil prices stabilise but supply issues send mixed signals
Oil prices are back above $70, but is this sustainable? The trader community appears split over oil’s course. Elsewhere, natural gas keeps its rally going, enjoying its time in the sun.
There appears to be a growing split in the oil trading community.
On one hand sits those who believe the OPEC+ engineered supply deficits will help foster high prices as demand recovers. On the other there are those traders who feel demand is being erased before it can reach its peak, thanks to growing Covid-19 cases and low vaccination rates worldwide.
How will this factor into oil prices? It’s hard to say at this stage. Current prices seem to sit around the fact traders have priced in the worst case scenario.
As of Tuesday, WTI futures were trading for around $71.6.
Brent contracts were exchanging hands for roughly $73.45.
Apart from rising cases in key importers, other factors at play here could put pressure on oil prices.
Supply squeezes maybe a recurring theme until the pandemic is over, even with OPEC & allies tapering up production by 400,000 bpd each month from now until April 2022.
One is China’s clampdown on import quota abuse. Authorities in the world’s largest crude importer are planning a crackdown on the misuse of import quotas. This may create a 20-year low in inbound Chinese oil shipments.
Looking to EIA storage data, inventories increased by 2.1 million barrels in the review period up to July 16th. At 439.7 million barrels, U.S. crude oil inventories are about 7% below the five year average for this time of year.
But there is positive news. Rig counts also continue to rise. Baker Hughes reports the total US oil & gas rig count has increased for the fourth consecutive week, indicating strong future output.
As of week-ending July 23rd, 491 rigs were active in US production areas – the highest level since April 2020. Seven oil rigs were added to counts, although gas rigs stayed static.
Natural gas trading
Natural gas started the week strongly, breaching the $4.00 level, and continuing gains made across last week.
Intense heat in key US geographies is helping power the rally as short-term cooling gas demand intensifies. European weather patterns, however, are trending towards cooler temperatures, which may lower demand here across the rest of the week.
As per Natural Gas Weather: “National demand will be strong this week as hot upper high pressure rules most of the US w/highs of 90s to 100s, including 95-100°F Texas.
“A stronger weather system w/showers and cooler air will push across the Great Lakes and Northeast late in the week and next weekend w/highs of 70s and 80s to ease national demand.”
While US oil rig counts have increased, according to Baker Hughes, gas rig counts have stayed static. As of week-ending July 23rd, 104 gas rigs were operating in key US gas production geographies.
US working gas in storage was 2,678 Bcf as of Friday, July 16, 2021, according to EIA estimates. This represents a net increase of 49 Bcf from the previous week. Stocks were 532 Bcf less than last year at this time and 176 Bcf below the five-year average of 2,854 Bcf. At 2,678 Bcf, total working gas is within the five-year historical range.
Oil retreats following OPEC+ decision as Covid fears mount
Following a month of strong gains, oil price action has retreated.
OPEC & allies finally reached on the 18th last week after nearly two weeks of back and forth. OPEC+ will ramp up production 400,000 bpd every month from August onwards. These increases will stay in place until December 2022.
In practical terms, this should mean lower prices. We’ve seen oil push to new heights during the OPEC+ tussle. Tight supplies were supporting prices. In anticipation of the taps opening up, however, WTI and Brent contracts have dropped back to expected levels.
At the time of writing, oil prices had below the $70 mark for two of the three major benchmarks. WTI is currently trading for $67.15 – the same levels seen towards the end of May.
Brent is trading for around $69.40.
This is partly due to the OPEC decision, but also the very real threat of the global Covid-19 pandemic.
Despite economies like the UK cheering about freedom and lowering restrictions to almost pre-pandemic levels, the virus is still very much a threat. The delta variant, in particular, continues to push infections back to levels not seen since last summer.
This had fed into a growing sense of unease, which may explain the soft price action and retreat we’ve seen in oil prices over the past couple of days. Travel restrictions in Asia, for example, have blunted optimism around jet fuel recovery this year.
On the other hand, US oil stocks continue to fall at a rapid rate. The EIA’s crude oil inventory report for week ending July 9th showed a 7.9m barrel week-on-week fall. Oil inventories are now 8% below the five-year average for this time of year.
While US consumption appears to be healthy, it will be interesting to see how it contrasts with global volumes, particularly if more shutdowns occur.
Some are still feeling bullish. Goldman Sachs, for instance, has reiterated its belief an $80 for Brent will happen in 2021. Brent crude did almost reach that level during the recent rally, but it remains to be seen if oil can make such gains again before the end of the year.
Natural gas trading
Natural gas prices started the week on a bullish footing with prices floating around the $3.70 level.
According to EIA research, US gas consumption was up last week, driven by an uptick in power generation. For the week ended July 9th, total gas consumption was up 2.1% with a higher 3.4% week-on-week increase in natural gas consumed for power.
Despite this, more gas is being held in US inventories. The EIA report states working gas in storage rose 55 Bcf compared with the previous week for a total of 2,629 Bcf. Year-on-year, stocks are lower overall, standing at 543 Bcf less than last year and 189 Bcf below the five-year average of 2,818 Bcf.
A moderate demand outlook for the rest of the week into next week is forecast by Natural Gas Weather. Two weather systems, one bringing showers and cooler temperatures across Central, Southern and Eastern seaboard states, and another bringing hot temperatures in the Northwest, are creating a conflicting demand picture.
Stocks bounce after sell-off, stagflation worries persist
In a word, stagflation. That’s how I’d sum up what this market angst is all about. Or at least, the spectre of stagflation. Simply put, growth is already decelerating and downside risks to the growth outlook are darkening due to rising cases, Delta and other emerging variants, as well as worries about potentially lower vaccine efficacy. At the same time, inflation is shooting higher. Supply side constraints (supply chain tightness, availability of labour/parts) are a problem central bankers cannot solve.
As I detailed on August 12th 2020, the Fed was always going to struggle to get a grip on inflation as it let the economy run hot – AIT was developed before the vaccines had their effect and the Fed has been slow to respond. (US inflation hot, stocks keep higher as bonds slip). “The Fed should and could be relaxed about headline inflation running above 2% for a time, instead prioritising the employment level, but it also means inflation expectations can start to become unanchored as they did in the 1970s […] In a nutshell, if inflation expectations lose their anchors, then we are faced with a stagflationary environment like nothing we have seen for 50 years. High inflation, low growth for years to come is the unwanted child of a global pandemic meeting massive government intervention. And, expounding further on Aug 13th: “The risk is that inflation expectations can start to become unanchored as they did in the 1970s when the Fed had lost credibility, this led to a period of stagflation and was only tamed by Volcker’s aggressive hiking cycle.”
Are we going to see another Volcker? I doubt it very much, I doubt central bankers have the bottle or mandate even (full employment, remember) to engineer a recession to get everything back on an even keel.
Stocks slumped at the start of the week and bonds rallied, sending the US 10yr benchmark to its lowest since February at 1.17%. The S&P 500 declined 1.6%, whilst the Dow Jones industrial average was more than 2% lower for the session, though both closed off the lows of the day. It was the worst single day for the Dow since October, as the major cyclical plays – energy and financials – led the losers. The S&P 500 briefly traded below its 50-day SMA but managed to close above this level, and managed to just hold onto our horizontal support drawn across the May-Jun peaks. The Vix spiked to 25.
As previously noted here, the whole story of the bull run since the vaccine news/Biden win in Nov is littered with ~5% type pullbacks to that 50-day line, before the uptrend is resumed. Could it be different now? Perhaps, but it would be betting against form to suggest so. We’re only about 3% off the recent all-time high and this pullback may not be over until at least that becomes a ~6% drop to about the 4150 area. Cyclicals have been selling off for a while now and the market was being propped up by an ever-narrower base of mega cap tech/growth.
European indices endured a brutal session, with all the major bourses registering declines of more than 2% for the day. The FTSE 100 tumbled through its 100-day moving average, hitting a three-month low. In early trade, stock markets in Europe staged a fightback, but I’d flag the risk that this a) a deceased feline and in any event b) is a market in a summer funk that can cut you up in both directions. UBS boosted sentiment with a net profit of $2bn for the quarter, up 63%. EasyJet shares rose as it signalled it would fly 60% of Q4 2019 capacity in the final quarter.
The FTSE rolled over after failing to sustain the 78.6% retracement above 7,200. Starting to look a tad oversold and we should anticipate a retest of 7,000 but further weakness cannot be ruled out a bears can look to a possible retreat to the 61.8%/23.6% at 6,650, close to the 200-day SMA.
It’s another story of moving averages in FX, with cable dropping below its 200-day line. It’s not traded under the 100-day and 200-day SMAs since Jun 2020. Not a heap of support below and a swift move back to 1.350 cannot be ruled out.
Finally, Bitcoin futures: as I said yesterday the price action was dreadful and shouting out for another leg lower, duly delivered as risk took a beating yesterday (great hedge…). Price action now under $30k and eyeing the Jun low.
OPEC+ deadlock unresolved – what does this mean for the oil trade?
OPEC & allies are yet to reconvene its July meeting as supply pressures mount on the cartel. Will we see the deadlock broken soon?
A week on from OPEC and allies breaking up production tapering talks, the deadlock doesn’t look like it’s going to be shifted soon. The window for higher output in August is closing. This comes despite clamour from the cartel’s various members to take advantage of strong oil prices.
Saudi Arabia and the UAE remain at loggerheads over production volume increases. However, both have locked August supply volumes in with their respective customers.
An upcoming Islamic holiday, coupled with fixed August sales, means reconvening OPEC+ if an accord is reached is unlikely to happen until the end of July or even early August. As it stands, output will remain the same in August as it was in the previous months – assuming OPEC members and allies don’t just go rogue and start pumping more to take advantage of high oil prices.
And there’s the rub. Part of the reason why oil prices are so strong is OPEC & allies finding common ground and tapering production gradually instead of flooding markets with crude.
At the time of writing, oil prices for WTI and Brent had peeled away from highs seen last week but are still performing strongly. WTI futures contracts are at the $74.39 level.
Brent crude is currently trading for $75.45.
August will likely be a story of tighter global supply meeting high worldwide demand. The Biden White House has advised OPEC+ to find a way through and begin its proposed 400,000 bpd production increase.
This comes as EIA data for week ended July 2nd saw one of the highest drops in US crude inventory stockpiles since 2019.
Crude inventories fell by 6.9 million barrels to 445.5 million barrels in the review period, reaching their lowest levels since February 2020. This beat analyst expectations, which forecast a 4m barrel drop.
Gasoline demand surged to a one-week record, but the four-week average of gasoline supplied was at 9.5 million bpd, the highest since October 2019. That helped lower gasoline stocks by 6.1m barrels.
Perhaps in response to the OPEC tussle, or because the conditions are brightening for domestic oil producers, the US rig count has increased for the second week running this week.
According to Baker Hughes, the number of operational US rigs is at its highest level since April 2020 with 378 currently operating.
Natural gas trading
Natural gas started the week on a strong footing, with prices staying above the $3.70 level.
Hotter weather this week into next is expected to cater to heightened cooling demand, as per Natural Gas Weather.
NGA says: “National demand will increase this week as upper high pressure builds back across the East with highs of upper-80s to 90s, while still hot to very hot over the West into Texas and the Plains with highs of 90s to 110s. A weather system with areas of showers will stall over the South Great Lakes and East-Central US with highs of 70s to lower 80s for locally lighter demand.
“National demand will ease late next weekend as weather systems over the Great Lakes and East cool highs into the 70s and 80s, although still hot over the West, Texas, and Great Plains. Overall, national demand will be high this week.”
Broadening the view, the EIA is predicting a decline in natural gas consumption throughout the US in 2021. According to recent research by the energy body, US natural gas consumption averaged 83.3 Bcf per day in 2020 – down 2.2% from 2019. The drop was partly driven by a fall in natural gas used to generate electricity, which was a result “demand destruction” the EIA says.
The energy authority believes consumption will have fallen 1.1% overall by year-end 2021 but will rise by 0.7% across 2022.
Working gas in storage was 2,574 Bcf as of Friday, July 2nd, according to EIA estimates. This represents a net weekly increase of 16 Bcf. Stocks were 551 Bcf less than last year at this time and 190 Bcf below the five-year average of 2,764 Bcf.
Baker Hughes reports the gas rig count has increased. 101 US natural gas rigs are now currently operating in key production areas.
European stocks slide in wake of Fed minutes
European stock markets continue to trip the ranges – sliding sharply this morning following yesterday’s jump. The FTSE 100 dropped 1.3% in early trade to the 7,050 level, whilst the Euro Stoxx 50 declined 1.7% to test 4,000. Asian shares were broadly weaker overnight, with a steep fall in South Korea registered as daily Covid cases there surged. Bonds are still bid as weaker hands get washed out with the 10yr Treasury note yielding 1.28%, a new 5-month low in the wake of the Fed meeting minutes – it’s either sending a warning signal or it’s just a flush before the move higher. US stock markets were mildly higher yesterday, with futures pointing to a drop at the open. Apple shares hit a fresh record, whilst meme stock favourites such as GME, WISH and AMC fell sharply. In London, money transfer app Wise got off to a solid start as shares rallied on the first day of trade. Shares in troubled Chinese ride hailing app Didi fell another 5% as it faces a lawsuit from US shareholders.
Minutes from the FOMC’s meeting in June showed pretty much what we knew; policymakers are moving but with a degree of caution. “Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated” but it is “their intention to provide notice in advance of an announcement to reduce the pace”. Meanwhile China is back in the game – the State Council issued a statement saying it would seek “to increase financial support to the real economy” by using “monetary policy tools such as RRR cuts”.
Deliveroo reported a better-than-expected rise in revenues in the second quarter but cautioned it would not lead to better profits. Gross transaction value (GTV) rose 76% year-on-year to £1.7bn. For the full year, the company raised its GTV growth estimate to 50-60% from 30-40%. However, gross margins are seen in the lower range of what was previously communicated, with management citing investment and lower average order spend. Looks to me like it should be making more money if GTV growth is a full 20 percentage points higher than expected. Poses serious questions about the model if it cannot at least deliver margins in the upper range of expectations on such impressive sales growth.
Oil prices slipped as the gulf between OPEC and the UAE showed no signs of closing. The UAE signalled it could open the spigots to pump at will. The fear is the supply deal could unravel, heaping more crude on the market. WTI (Aug) held at $73 the first time but cracked on the second attempt and quickly declined and found support at $71. Another test at this level can be expected.
Finally, it was great to see Wembley almost full last night with tens of thousands of fans. No masks, plenty of singing, social distancing forgotten. So why can’t my kids have a school sports day? The inequities of opening up are legion, almost as much as the inequality of lockdown. We can only pray the mask-wearing Covid Stasi are silenced for good and we can get on with our lives.
Stocks pick up, bonds remain bid ahead of Fed minutes
European stocks edged higher early Wednesday after taking a sharp tumble in yesterday’s afternoon session. Bonds and the dollar rallied, leaving benchmark yields at their lowest in some months, knocking the wind out of the cyclical recovery trade. The FTSE 100 ended the day down 0.9% at 7100 but has regained some poise in the early part of today’s session to trade at 7,130. European markets remain very much stuck in month-long ranges. Shell shares rose more than 2% on a promise if higher shareholder returns.
Mega cap growth helped the US market keep a more level head as the S&P 500 declined 0.2%, easing away from a record high set last week, whilst the Nasdaq rallied by almost the same amount. The Dow Jones fell 0.6% as economically sensitive names like Caterpillar, Chevron, Home Depot and JPMorgan slipped. US 10yr yields are under 1.34% this morning, a five-month low. Similar story for gilts, with the yield on 10yr paper at 0.627%, the lowest since Feb.
Yesterday’s pullback and the sharp drop in bond yields reflected doubts about the pace of growth, and the extent to which costs are going up for businesses. The talk is that peak growth is behind us and The ISM services PMI reflected the trouble for growth is not on the demand side; quite the reverse. Businesses anecdotally reported ‘supply chain outages, logistics delays and employee- and management-staffing constraints’ and that ‘business conditions continue to rebound; however, like everywhere, the challenges in the supply chain are numerous. We continue to see cost increases, delayed shipments, pushed-out lead times, and no clarity as to when predictive balance returns to this market’. I fail to see how this implies inflation will be transitory.
A run-up in the S&P 500 of 5% in the last two weeks looks to be unsustainable and at the very least I’d anticipate we see a pause and trading sideways, if not a deeper correction over the summer. For now, though, Tuesday’s dip is not a sign of reversal. The market is narrowing, too. The S&P 500 would have had a much sharper drop (~1%) had it not been for the 14 index points added by Apple and Amazon. Shares in Amazon rallied almost 5% as the US Defense department cancelled its $10bn JEDI contract with Microsoft, with the Pentagon saying it will seek a new multi-vendor contract. It will seek proposals from both Microsoft and Amazon.
The narrative and the ‘macro picture’ seem a little less understood – has growth peaked, will inflation wipe out economic gains, has the Fed really got inflation angst? We get to find out a lot more about that with today’s release of the minutes from the last FOMC meeting. Earnings season is coming up but it’s well known we are going to see some monster numbers and it is less obvious how Q2 reporting will drive the market higher – if anything it could lead to a round of profit taking and recalibration. Expectations are already so high. But we can’t ignore the bond market and equity market concentration in growth stocks – if bonds find more bid and the 10yr pushes yet lower to 1%, then the stock market can keep gliding higher.
The dollar is holding higher against peers ahead of the minutes from the June meeting. The meeting revealed a couple of things we had pretty well expected: a) Fed officials are talking about tapering, b) dots are coming in due to the rapid economic rebound and, less well anticipated, c) the Fed is a little bit concerned about letting inflation off the leash. The minutes should provide some further clarity/explanation about the Fed’s likely position but ultimately we don’t see any change until Jackson Hole in late August or the September meeting. The trouble for the market is dealing with the Fed’s reaction function in terms of yields: a hawkish Fed and quicker taper/hike ought to drive yields higher, but the reaction to the June meeting saw the reverse as the statement and projections implied the Fed wouldn’t let inflation get out of control. So now we know this, we are likely to see a more considered market reaction that, all else equal, should see rates move higher this year as the Fed lays down the tapering agenda and inflation remains more persistent than central banks think.
EURUSD made a fresh 3-month low in a further extension from the bear flag downside breakout.
GBPUSD: firm rejection of 1.39 yesterday and continues to stick to the downtrend. For now, continues to scrap around the 1.38 area, felling just below this morning and eyeing a break to 1.3660 area, the 200-day SMA and Mar/Apr double bottom.
Crude oil futures catching a little bid in early trade this morning after yesterday’s reversal. Concerns remain that the failure by OPEC to agree to gently increase production could lead to the output agreement unravelling, which could lead to more crude coming on the market. But there is a lot of uncertainty – if OPEC+ stick to the current quotas global inventories will draw down further and the market will further tighten, squeezing prices higher.
Gold is getting a filip from lower yields, though the stronger greenback is checking its advance. 10yr TIPS have slipped to –0.94%, the lowest since the middle of February as nominal rates fell. Price action remains above $1,800 with the bullish crossover on the MACD confirmed.
Afternoon rap: Rates, USD bid, stocks slip
Post-July 4th blues: Rates were bid and yields slipped, with the US 10yr back to post-Fed lows around 1.35%. It could be that there is a fair amount of fixed income flow to greet the start of the new quarter after a solid run for equities in H1. It could also be that the market is betting the Fed won’t let the economy run all that hot, and that infrastructure spending will be a disappointment. It could also be a factor of holiday-week illiquidity in US bond markets and a bit of Independence Day hangover. Personally, I think this is the kind of fake out you need before you see a good run up in yields later this year towards 1.7% on 10s. But if you really simplify it suggests the market doesn’t think growth will be as strong though the surveys say otherwise. The move lower came as the US ISM June services PMI hit 60.1, short of the 53.5 expected and down from 64 last month. As bonds rallied the dollar caught some bid with DXY back above 92.50, while stocks have slipped. Remember this moves also comes ahead of the minutes for the FOMC’s last meeting at which it signalled a renewed concern around inflation – the hawkish pivot.
Reflation winners faded and the FTSE 100, which is exposed to the pace of global reopening, is down around 1% as it took a sharp tumble as US cash markets opened at 14:30. The UK market was also dragged lower by a sharp pullback in oil prices, which seemed to follow the short-term-bullish, longer-term-bearish OPEC talks breakdown playbook, though in a much tighter timeframe than most of us thought. Utilities were higher by around 0.35%, whilst Basic materials and energy led the fallers. Financials were also hit by the decline in nominal rates.
The S&P 500 is down around half of one percent with big tech doing a lot of lifting to offset some sharp falls in other sectors with about 6:1 declining to advancing stocks. Energy and financials declined 2%, while tech advanced 0.5%. SPX currently sits around 4,330 with the Thursday close at 4,319 the key near-term support. The Nasdaq remained flat as lower rates = good for growth/mega cap/momentum names. Conversely, DJIA slipped almost 0.9%.
Oil has retreated sharply in the wake of the post-OPEC spike. It looks like the market is more worried about a potential crisis at the cartel than it likes the lack of fresh supply coming on in H2. WTI tests the 200-hour SMA at $74 where it finding a little support. A break could see $72. Traders seem concerned that the speculative positioning could be unwound in the coming days if the OPEC+ deal were to start to unravel, ultimately leading to more crude and a less stable oil market.
Gold: easing off the highs but remains well supported with bulls in ascendancy above $1,800 and bullish MACD crossover still valid.
OPEC+ meeting breakdown sends oil sky high
Oil reaches some of its highest levels for years as OPEC and allies walk away from July’s meeting.
OPEC+ were on the cusp of making a new deal at its July meetings, but talks have broken down.
What the market was anticipating as being more of a formality than a full-blown tussle has turned into something sour. July’s meeting has been abandoned.
The cartel and allies have been steering the course of oil markets successfully over the pandemic, but now faces a major hurdle in establishing harmony.
The UAE and the rest of the cartel are at loggerheads over OPEC+’s production tapering proposals. A plan to raise output by 400,000 bpd from August to December, and keep cuts in place beyond the April 2022 deadline, are yet to pass muster with the UAE.
The emirate is willing to accept the deal if its quota requirements are upgraded to match Saudi Arabia’s. Obviously, as OPEC top dog, the Saudis aren’t particularly keen on that. As such, meetings have been called off.
What’s bad news for OPEC is good news for oil traders. Prices have shot to highs not seen since November 14. WTI is trading at $76.65.
Brent crude is pushing the $78 level, trading at around $77.70 at the time of writing.
However, the breakup of talks suggests two things. Firstly, that competition amongst OPEC+ is growing in the face of higher global oil demand and higher prices. Second, concerns about global oversupply are still there.
Away from OPEC, US crude inventories are now at some of their lowest levels for years. A combination of slowing domestic production and rocketing fuel demand means stockpiles continue to drop week on week.
According to EIA data, US reserves stood at 452.3m barrels as of week ended June 25th. That is a 15.2% year-on-year increase, and also 3.4% lower than in the same week in 2019.
Stocks at Cushing, Oklahoma, the US’ designated NYMEX crude futures delivery point, have dropped too. Stocks were down 1.5m barrels as of week ended June 25th, totalling 40.1m barrels – a 23.3% decline against 2019’s pre-pandemic levels.
Natural gas trading
Natural gas prices started the week at a bullish $3.738.
However, weather forecasts may cause fluctuations in demand over the coming weeks. According to NaturalGasWeather predictions, national demand is expected to ease this week with heavy showers over the Great Lakes and East.
Next week, national demand will increase next week due to hot conditions over the West and warm conditions over the South and East.
Attention is being paid to Cyclone Elsa brewing in the Gulf. Demand may fall upon the colder, rainy temperatures Elsa could generate. LNG cargoes could also slow.
Overall, the pattern remains just strong enough to be bullish over the coming week and into the next.
Looking at stockpiles, the EIA’s report for week ended June 25th showed natural gas in storage rose 76 bcf during the review period.
The injection boosted stockpiles to 2.558 trillion cubic feet (Tcf), which is still 5.3% below the five-year average of 2.701 Tcf for this time of year.
Oil hits highest since Nov 2014, possible gold breakout
Oil advanced to its highest since Nov 2014 as OPEC+ abandoned its July meeting, after the United Arab Emirates stood its ground over production increases. The failure to agree to increasing production in August and beyond leaves the market even more in deficit than before, so front month WTI spiked to a near 7-year peak this morning close to $77. Saudi Arabia and Russia had agreed to increase production by 400k bpd monthly from August to December, adding an additional 2m bpd from current levels of supply by the year end. However the UAE wanted to recalculate the baseline for its production quota as it has significantly increased capacity in the last 2-3 years. This is an interesting moment for the path of oil prices – does the breakdown signal a push to $100 is on, or will it lead to more uncertainty and more oil on the market longer term? The short-term effect is less oil on the market (bullish), but it exposes the OPEC+ production deal to a risk of breaking down, which could see producers pumping much more (bearish). There is a risk that compliance with current production quotas will lessen, whilst the UAE could yet threaten to leave OPEC and pump what it chooses. Sec gen Barkindo said a new meeting would be called in due course.
Stock markets in Europe edged a tad lower this morning after finishing higher on Monday despite a weak start to the session. Indices continue to tread well-worn ranges. US futures are steady as Wall Street returns to life following the long weekend. The FTSE 250 hit a new record high in early trade as England heads towards the lifting of all Covid restrictions on July 19th. Clearly reopening is good for domestic growth, so it’s been seen as a positive for UK-focused stocks.
Shares in Chinese ride hailing app Didi slumped as much as 28% in pre-mkt trading after the app was removed from the country’s app stores. It’s a complicated picture – there are reports Didi knew of a regulatory crackdown and was even asked to delay its IPO. Didi says it had no knowledge of the actions by the cybersecurity regulator. The stock only started trading on Wednesday and the ban announced Sunday. China is cracking down on big tech, but the decision to remove the app from domestic platforms appears to be timed for maximum impact and embarrassment. China’s Communist Party is bristling at the number of Chinese companies listing in the US this year, but there is a genuine concern at the heart of this – regulators are not impressed at the way Didi and other Chinese tech companies handle data. The SEC will not be impressed either way.
Sainsbury’s reports like-for-like sales rose 1.6% in Q1, with sales across the board higher than expected in the quarter as it benefitted from continued pandemic-related restrictions. On a two-year basis, total retail sales are up more than 10%. Management raised the profit outlook for the year to £660m against £630m anticipated. Sainsbury’s says it will use some additional profit to invest in the customer offer – yesterday it announced £50m on targeted price reductions on ‘everyday essentials’. Supermarkets have done well out of the pandemic, but it’s unclear the extent to which reopening will negatively impact sales against some very tough comparisons. Inflation is also risk in this ultra-competitive sector. If you’re a shareholder, the last thing you want is a supermarket price war right now.
It’s been a tough year for Ocado shareholders as the reopening trade went against them, leaving the stock down ~14% YTD. But shares are up 2% this morning after another solid half-year report. Group revenues rose 21.4% to £1.3bn, with its retail business growing to £1.2bn, up 19.8%. The waiting game continues abroad: International Solutions revenues of £26.6m but management affirmed that Ocado Smart Platform (OSP) fees are building as expected. Group EBITDA more than tripled to £61m, but still the group reported a loss before tax of £23.6m, though this was down from £40m last year. Meanwhile Morrisons is steady at 266p as investors bank on another offer or two before this bidding war ceases.
Australia’s central bank said it will begin tapering asset purchases to maintain the target on the country’s three-year yield. The Reserve Bank of Australia will pare weekly bong buying from A$5bn to A$4bn as it continues to target a yield of 0.1% on its three-year paper, while leaving the benchmark interest rate unchanged at 0.1%. Overall, the message was a little more hawkish than expected, with the tapering and change in language around the forward guidance. AUDUSD advanced to its highest in a week, with 0.76 offering near-term resistance.
Elsewhere, the dollar fell as the European session got underway. GBPUSD continues to break out of the downtrend.
Gold is firmer with a bullish MACD crossover confirmed on the daily chart and push clear of $1,800 now possible.
Stocks slip, Morrisons up as bidding war intensifies, OPEC still stuck
European stocks slid early on Monday as they continue to run up and down well-worn ranges. On Friday, the S&P 500 rose for a 7th straight session and notched another all-time high after a strong jobs report. The nonfarm payrolls report indicated US employers added 850,000 jobs last month, the strongest number in 10 months and a sign that hiring is accelerating as pandemic-era support is scaled back. However, the unemployment rate rose to 5.9%, against expectations it would fall to 5.6%. In all this was a positive report for stocks, indicating solid-but-not-too-hot economic recovery and keeping the Fed on the course the market sees it on. Yields fell, with the 10-year back to its lowest since March, and the dollar eased back after being bid up all week. The soft finish last week for the dollar has continued into Monday but we should caution that the Independence Day holiday today, held over from yesterday, will keep US markets closed, and maybe keep equities from making any serious moves. Overnight Asian shares were steady as the Caixin services PMI fell to a14-month low.
Bidding war intensifies: Morrisons shares leapt again after management said over the weekend they have accepted a £9.5bn offer from Fortress. The deal values the stock at 252p, a 42% premium to the undisturbed price, plus a 2p special dividend. Apollo Global Management said in a statement this morning that it is now considering an offer. Shares this morning trade up 11% at 267p, reflecting a premium to the agreed bid that indicates investors believe there could be more juice to be squeezed from this particular bidding war. I think there could well be another offer or two and 280p might be seen before it’s a knockout. We’ve talked fairly regularly about the amount of private equity money there is waiting for UK companies, which are cheap vs peers. Given our interventionist chancellor wants to open up the listing process to make it more appealing to list in London, he may also want to consider ways to shore up the defences of public companies. When you look at UK valuations vs US and even European peers it’s still too cheap.
Talks among OPEC members and allies continue today after the cartel failed to reach agreement on a planned increase in production last week. The UAE remains the obstacle to the OPEC+ group raising output by an extra 400k bpd each month from August through to December, slowing turning on an extra 2m bpd by the end of the year. It would also extend the production agreement through to the end of 2022. The UAE, which threatened to leave OPEC last year, says it unconditionally supports a deal but is seeking better terms. Essentially it wants more share, saying that the original output deal no longer reflects the country’s production capacity. WTI for August trades above $75, with the market fundamentals apparently bullish whether there is a deal or not. An unusually sedate oil market around a drawn-out, disputed OPEC meeting tells you the market is tight and 400k bpd is not enough to right it.
Solid run up in gold as yields came off but $1,800 remains obdurate defence. Watching potential bullish MACD crossover. TIPS are supportive with the 30yr inflation protected yield negative and at its lowest since February.
Bitcoin futures holding under the 200-day SMA: