Overall market sentiment has moved decidedly into the bear camp, as prices slid substantially in yesterday’s session with the S&P 500 down over 50 handles at one point. This is really more of a lack of confidence move rather than a move firmly rooted in fundamentals.
China slowing and European issues, exacerbated most recently by the emissions fraud coming out of Volkswagen (OTC:VLKPY) have an obvious effect on price action. However, it does feel that the most likely culprit for this unwinding of the equity markets is the FOMC and the no confidence vote they cast some 10 or so days ago. The rhythm this drum keeps beating is starting to get monotonous to say the least, day after day, month after month and frankly, year after year, pegging the market action to a group of regional bankers' thoughts on the market.
Yesterday the market was very modestly higher following a push lower to 1861 as market participants took a collective sigh and waited to see if this liquidation has any real legs to the downside. The low yesterday represented a 12% decline off all-time highs reached earlier in the summer. It has not surpassed the 14 % decline reached on August 24th with a low of 1823 in response to the worse-than-expected slowing out of China that really started this recent bout of global concern.
The effect of all this on fuel pricing is interesting, to say the least. Energy pricing really started this move many months before equities started to take the global slowdown into effect, so for the most part all this is relatively priced in to the current market levels. The drive lower in energies started as a supply side sell-off that morphed into demand side concerns which have kept prices low.
Consider that the S&P markets where in the 2100 handle while crude was on its low for the year at 37.75; Now the S&P is in the midst of a major correction while WTI is trading in the mid 40s—it is easy to see the larger picture disconnect. In fact, this disconnect could continue, as crude is showing some signs of higher potential with fundamentally bullish developments starting to show up in the headlines.
Jet fuel and gasoline are setting records for demand, mostly due to the relatively low price compared to recent years, though low prices alone can’t account for this. There must also be some semblance of economic strength to support the price or the free fall would continue under crushing supply and little demand. So, one can conclude that as demand continues to remain high in the refined products, the price most likely will continue to find support despite the weakness of the overall market.
Furthermore, news on the US shale credit crunch is proving to be overdone as well, as we are seeing more banks renew credit terms with beleaguered shale producers who were thought to be in trouble when their current deals ran out. The stability of price at these levels has probably been a bit of a vote of confidence to lenders. The reality is that in order for the doomsday credit crunch to truly hit the US shale market the price would have to be much lower for a sustained period of time.