OPEC as Santa

Weekend Dec 3 2016

Oil Traders Decide OPEC Really is Santa

Yes Virginia there is a Santa Claus.

Eight-year-old Virginia O’Hanlon wrote a letter to the editor of New York’s Sun, and the quick response was printed as an unsigned editorial Sept. 21, 1897. The work of veteran newsman Francis Pharcellus Church has since become history’s most reprinted newspaper editorial.

This past week oil traders, following Virginia’s lead of 1897, deciding that indeed, OPEC is Santa. The price of oil leapt 9% in one day. Both West Texas Intermediate and Brent topped $50 by the end of the week. Impressive yes but really took oil to the very top of its recent $40-$52 trading range. And, yes it is the Christmas season but let’s consider past history.

OPEC has only ‘controlled’ oil prices twice in history. The twice celebrated event in fact was not a production cut-back but the simple refusal to sell to the United States in the 1970s.   And there is no OPEC monitoring system to keep members from exceeding voluntary quotas.

Non-OPEC member Russia has simply agreed to a ‘freeze’ on production. And this comes after increasing production half a million barrels a day over the last few months.   The problem as always is that most oil exporters literally have nothing else to sell. If Nigeria or Russia were to throttle back on oil exports, what else do they have to sell for hard currency? The answer is nothing, which is why such accords inevitably end in rancorous discord over excessive production.

Even if the promised 1.2million barrel per day cut back happened, that would simply put production where it was in the second quarter of 2016.

The move in natural gas is perhaps more interesting. The price has doubled this year to near $3.60. It will be interesting to see if the new administration favors more natural gas usage in trucks and automobiles.

While oil prices were surging, bond prices were imploding. We have stated several times in this space that the low in interest rates has been seen this year. ‘Analysts’ now warn that interest rate increases could affect mortgage demand, but we are not at those levels yet! When I began trading bonds in 1984, Treasury yields were north of 12%.   The widely followed ten-year yield has doubled since July from 1.4% to 2.5%. I am not predicting a return to double-digit rates but please recall that a normal mortgage rate would be in the 6-8% range.   The benchmark bond fund TLT has fallen 16% in price since July. Utility and REIT shares have fallen 14-16% as well. While such prices look overdone for now, expect fierce rallies and then a resumption of the move down in, which is to say a bear market. This decline has wiped out the returns on utilities and REITS for the last two to three years.

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After brokering a deal to curb steel prices and union wage demands, US Steel announced it was raising steel prices anyway.  Then President Jack Kennedy felt betrayed and launched an offensive, acting to have the Government purchase from firms not raising prices. The companies began backing off a week later.

This past week President Elect Trump strong-armed United Technologies into keeping some 1,000 jobs in Indiana. That delivers on a campaign promise but raises the specter of micro-managing individual companies from the White House. But, what else is new?

The Executive Offices of UTX are a revolving door of the sort that Washington DC offers as a special perk to the best connected. Alexander Haig moved from Chief of Staff of the US Army to NATO Commander to UTX CEO to Secretary of State; those dots are all connected.  Ten percent of UTX business is defense related. So UTX is especially vulnerable to such Federal arm-wisting. And, it is in Trump's interest to get the UTX billions overseas back here invested in something other than stock-buy backs. Oh, the names of the power players change but the same firms, UTX, Goldman Sachs, a handful of law firms, are still the permanent occupants of the White House.

Presidents come and go but Goldman Sachs always has their man in the White House. And remember, Goldman only has one client, Goldman.

Follow Dennis at http://www.themarketperspective.com