Now Wait Just A Darned Minute On Oil

There is a moment when springtime is just about to pop and a beautiful warm day tells you, “Yes, yes… this is it!”

Oil booms, U.S. equities boom, Asian and European stocks also jumped, the dollar strengthens and the world seems right (except for gold’s plunge).

The compass naturally points sharply and insistently toward oil mainly because we had news that the U.S. rig count continues to drop; Iran is going to take a while longer to get to its max-out level of product of 7.2 million barrels per day, and the “output freeze” from OPEC and some of its non-OPEC cohorts like Russia.

Reports from the International Energy Agency (IEA) said U.S. shale oil production will drop 600,000 barrels this year and another 200k in ’17.

Sounds like a great scenario for even more rise in the price per barrel. Today, East Texas Intermediate roared ahead over 6.2% while Brent North Sea snapped up over 5.00%.

But before you break out the piñata and the mariachi band, ponder that world consumption has been dropping far faster than production for two years. And, because the U.S. shale industry has been roughly shaken out does not mean that U.S. production in more conventional fields is dropping. We have to recall that shale is very expensive to process into petroleum. Moreover, demand has slowed even further in January and now February.

Morgan Stanley said that low gasoline consumption is particular hurting energy prices. The big bank then went out of its way to say that, “China demand looks particularly challenged with several negative trends of late.”

With all that and more in mind, the IEA report also said bluntly: “Today's oil market conditions do not suggest that prices can recover sharply in the immediate future.”

All right – now comes piling-on time when critiquing today’s huge crude gains. Tomorrow is the end-of-month and so traders are trying to close the discount between the expiring (March) front-month contract and the nearby contract (April); March is/was nearly $2.00.

But in this case, what goes up must come down.

Whether equities will ignore these anomalies and the trick of the calendar is anyone’s guess as we watch afternoon trading in New York. Crude and U.S. equities have given back some gains, but nothing to suggest there is anything else afoot but some mild profit taking.

As if to support the more optimistic view of equities in the United States, two mega-companies, United Technologies and Honeywell are in serious merger talks.

We feel there are a number of headwinds, none problematic by themselves but rather capable of inflicting damage when bundled together.

There is still the China problem. It’s slow, verging on reverse. The EU has its handful with the so-called Brexit from the union, not a positive move from our vantage point. We are also considering that markets do not particularly like the way the American polity is acting and feel the election might be disruptive one way or another. Sentiment is an unpredictable animal.

Let’s end on some hard – and hard-to-take – news. The flash read on Market Manufacturing PMI for February in the U.S. was 51.0, down from the final January print of 52.4 and hitting its lowest since October 2012.

So, is it helium, hydrogen or just a case of the markets saying, “Look ma, no hands”?

Wishing you as always, good trading,