Crude Prices Crowd Other News, Confound Common Sense

Yes, we know the old advice – Buy on the rumor, sell on the fact. But crude isn’t exactly moving on rumor, and there are surely a lot of facts floating around. Yet, up go prices.

Rumor has it that OPEC and other key oil players are going to get together and reverse their now long-withstanding strategy of low prices. No one is asking the question: “Why now?”

Perhaps the question isn’t being asked because OPEC nations, led by the Saudis, are not abandoning the low-price strategy just yet.

We also have to ask the question about the role the United States and the rest of North America are going to play as key swing producers in the energy game. As the price of West Texas Intermediate already seems ready to touch $50 a barrel, what will happen when North American producers turn on their spigots once more? Easy enough to figure out. (Reminder – it takes about two weeks to reactivate conventional wells; it take not quite one month to reactivate fracking wells.)

Meanwhile, other fundamentals have not changed. China demand is slack. Stockpiles, although having drifted slightly lower recently, are still at historically high levels. There are other players like Iran ready to barge back into the oil scrum. Conservation efforts are keeping consumption down. Renewable sources keep winning larger market shares, although the moves are not dramatic

Most curiously, the rise in oil prices is not helping energy-heavy equities indices like the Dow and S&P 500 put some oomph behind prices. (Although today energy stocks did fairly well but there is no coattail effect.) We think the overall inhibition of energy stocks to go full throttle is that analysts are agnostic on price direction for the moment. We’re looking for a mid to late-September retesting of crude price lows that may well hang about until the holidays. Think $30 per barrel.

Crude prices are not the only factor confounding traders, however. The lackluster activity in China has many worried, especially those who wheel and deal in the emerging Asian markets like Vietnam, Indonesia and Malaysia.

Then there are the Fed jitters. What will the Fed do? What won’t it do? When will it begin? How long will it last once it starts? The sky is falling. Let us go tell the king! Meanwhile, the U.S. Congress sits on its hands “passing the buck” on fiscal responsibility to the Fed over and over, which has only monetary tools in its kit.

The next Federal Open Market Committee meeting will report out its findings and decisions on September 17^th.

That means we have only thirteen business days left before wheels are put into motion – or not – by the world’s most important central bank.

We’re thinking more and more that the question will really boil down to how the Fed perceives its influences on the rest of the world, especially developing countries. Of secondary importance is the rash ideology of the hawkish wing that simply feels “it is time” to raise rates because they’ve been so low for so long. Finally – and this is partially married to item #1 – how much of an interest rate spread between the U.S. economy and other economies’ rates is the global system prepared to handle?

It’s not a call you’d want to be marked wrong on. It would leave a pretty big blot on your permanent record.

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Wishing you as always, good trading,