The New Doctor of Doom
Is Speaker of the House Paul Ryan the new doctor of doom? Once again, the speaker of the house changed the markets course just by opening his mouth. The last time was March 22nd when the speaker raised concerns about the ability to get the American Health Care Act (or AHCA) through the so-called Freedom Caucus, causing the biggest sell-off of the year up to that point.
Yesterday Ryan's suggestion that tax reform might not happen without a deal on healthcare caused the market to give back most of the day’s stock gains, wiping out what was a substantial rally. Speaker Ryan is the new party pooper that kills market optimism. Ok, maybe there is some reality to it but do you really want this guy at your party? Maybe it’s because he is a Green Bay Packer fan or maybe it’s just a dark cloud that follows him or maybe it is because he is the stock market doctor of doom.
Am I being a bit harsh on the good Speaker? The stock market also sold off on the Fed minutes that suggested that some Fed officials want to raise rates a little faster. They also discussed winding down their bond holdings later this year and that could add some upward pressure on interest rates and driving up the dollar. Maybe you don’t want those guys at your party either.
The stock market sell off did not help oil because it was already struggling due to another increase in crude supply. Yes, forget about the American Petroleum Institute (API) report that seemed to make more sense. The Energy Information Administration (EIA) version is keeping the bears in play. The EIA showed another 1.413-million-barrel rise in U.S. crude supply. That is amazing considering that crude imports fell by 674.000 barrels a day.
The crude supply increase included 524,000 barrels of oil that was sold from the U.S. Strategic Petroleum Reserve and big increase in supply on the Gulf Coast region as well as a 1.143-million-barrel increase in Cushing, Oklahoma. But also from traders dumping oil out of storage tanks in response to a tightening oil market. More on that later. Crude oil production went up 52,000 barrels a day to 9.199 million barrels a day but still below the 9.404 million barrels a day where we were at 2 years ago today.
The crude supply increase weighed on the market even as refinery runs soared back to 90.8% of capacity and supply of gasoline fell by 618.000 barrels and distillates by 536,000 barrels. Demand, week over week for products, fell off but in short, the EIA version of the report was disappointing because the API version was more bullish.
Still, considering the headwinds that oil saw, it did hold onto gains. The uptick in runs is a sign that demand for oil is just getting started. The OPEC cuts will balance the market and if we look at the crude curve, the market is starting to get it that this OPEC cut is for real.
Reuters today reports that while the:
jury is still out on whether OPEC can rein in a global oil glut but top commodity traders are betting it can by selling stakes in storage tank businesses that profited from oversupply. Reuters says that since January, Glencore (LON:GLEN), Vitol and Guvnor have completed or have been seeking to sell parts of their holdings in storage firms.
These sales of storage tanks are one reason we have seen these firms sell their oil they had stored, adding to recent supply gains. Reuters also says that, “The five top traders, who also include Mercuria and Trafigura, expect OPEC to extend output cuts into the second half of 2017, which would help draw down global inventories.” I agree with this assessment. While day to day the traders are fixated on the oil supply, we are seeing signs that this is changing. While the EIA is not showing it yet, the global crude market is in balance if not a deficit and supply will soon start to fall.
Natural gas should see a spring injection into supply but it may not be enough to slow that natural gas momentum. Natural gas is rising on nuclear power maintenance, weather and falling output. We should also mention record natural gas exports.