Oil Presents The Same Old Riddle Only Start From The Middle

Many experts are suddenly touting the idea that the oil crash and long-standing route is dead and ready for burial.

Certainly oil prices are acting as if that is true. At 3 o’clock in New York, West Texas Intermediate and Brent North Sea are up over 5.00%. For Brent, perhaps more significantly, it is looking to close over $40 per barrel.

As we often say about oil, however, “Wait just a darned minute.”

There is still a glut and the promise of an even larger glut, which may come courtesy of the United States and Canada. Mexico may join the party. Those three countries, in spite of what OPEC might believe, hold the key to world oil prices. Look for them all to bump production drastically right below $50 a barrel, if indeed we reach that number.

The other side of the glut concerns consumption, which is down, even if gas guzzling has come back into style in the U.S. It’s been an average to mild winter in North America and Europe, so fuel oil consumption is down.

So, we might be asking, why the equities performed so poorly? It’s most likely a one-day profit-taking and consolidation day, especially in the U.S. We did, after all, just experience a three-week rally. We’re looking for investors to buy the dips.

We’re also seeing, for a change, tech issues drag down the industrials.

We do have mixed messages coming out of the Federal Reserve concerning next week’s Federal Open Market Committee meeting outlook. Fed Governor Lael Brainard pushed for patience in raising rates, arguing that inflation is persistently under target. She did say also, though, that it should move back to the 2 percent target despite downside risks.

In a different set of comments, Fed Vice Chairman Stanley Fischer said inflation is accelerating in the United States. He did not make any concrete predictions about what the meeting next week might bring.

The FOMC meets March 15 and 16.

Because equities struggled almost uniformly across the world, gold found favor again as both haven and sound, longer-term investment. A bit of weakness in the U.S. dollar helped.

The Japanese yen was up almost 0.50% against the dollar, another sign that there was some haven interest while stocks resolve their uncertainties.

On the other hand, 10-year U.S. Treasury bonds had to offer a slightly better yield to attract buyers, acting in a countervailing manner vis-à-vis gold and the yen.

We are looking for a more decisive tone in stocks as the week progresses, even if that progress takes money to the sidelines. We think there will be a sell off in oil.

One note that could affect currency and interest rates is the European Central Bank’s meeting this week. Otherwise we are quiet on the data and news front for the rest of the week.

Wishing you as always, good trading,