Friday Nov 30 2018
Beaten Down Markets Take a Breather
The increase of 3.58 million barrels in US oil stocks this past week marks the tenth consecutive week of rising inventories. The US report is another factor in a bearish picture for prices.
Caroline Bain, Chief commodities economist at Capital Economics
Friday Morning 7 00 AM CST 11/30/18
The world is awash is oil inventory. And many of the oil producing countries, like the African and Iran Exporters, have nothing else to sell. Which means there is nothing else to support their economies. While %50 WTIC and $60 Brent might allow some profit, it won’t support the entire economy.
Saudi Arabia needs $85-87 oil to run the entire country. Mr. Putin says he is fine with $60 but can probably stand a drop to the mid 40s.
Chevron, Shell, and Exxon can stand prices down to the mid 40s as well. Whether the smaller shale producers can withstand such drops will be more clear when earnings are posted in January for the 4th quarter.
Until October 3, companies could sell forward their production for many months at over $70. That is no longer the case at $50. So reality check time is here as to which firms used the run up in price to $76 to prepare for another big setback.
Since July the percent of energy firms in a bull market has fallen from 75% to 6.9%. The charts do not offer the promise of a near term bottom. I suggested we needed a close or $62 to turn WTIC up, now hat number might be $58.
Regular 87 octane gasoline is $2.08 in San Antonio Future have collapsed from $2.15 in October to $1.40. The inability to move natural gas out of the Permian Basin to the coast had some producers receiving zero for their production in recent weeks rather than the $4+ futures price. Several pipelines will be finished by mid 2019 to move oil and gas. More transportation also means production is likely to increase.
The 617 point advance in the DJIA Wednesday generated a lot of positive buzz in the media. But there are reasons to remain cautious. This move up looks like a normal Wave C rebound, A up, B down C up, after the October collapse.
The Dow Transports are re-testing the 200 day moving average and need a close over 11,000 to turn the turned up. That is not far from 10,679 today but markets are trading lower as I write.
If stocks turn down next week, which I suspect they will, the specter of a bear market reality looms.