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Markets: In A Nutshell, It's Goldilocks With Nary A Rabbit Hole In Sight

Published 08/04/2022, 05:22 AM
Updated 07/09/2023, 06:31 AM

US equities were stronger Wednesday, S&P up 1.6%. Tech led, withNASDAQ up 2.6% on solid earnings while US 10-year yields down as Brent slipped 3.5% and is back below $100/bbl for the first time since July 12.

Following last week's Fed meeting that opened up the possibility of a slower hiking pace, markets are still running 'risk-on' despite the recent push back from Fed officials. But for stock investors, lower oil prices are a pleasure to behold as not only did the US 10-year yields drop but slip sliding oil prices also downshifted inflation expectations supporting that slower hiking pace thesis.

And another goldilocks ISM, this time from the services side, inspired investors and helped US stocks glide higher under the surface. New orders were notably higher while the prices paid index fell markedly. In a nutshell, it's pure goldilocks with nary a rabbit hole in sight.

Oil

Crude oil fell $3.76 to $90.66 per barrel to close at its lowest level since March 16. At Wednesday's close, WTI is 23% below the June 8 closing high of $117.15 per barrel. Yesterday's weakness comes after EIA data showed an inventory build in the US, and OPEC agreed to increase crude oil output by 100,000 barrels per day in September.

OPEC has agreed to a 100k b/d supply hike for September. Initially, Brent futures held near the highs as traders ran the calculus amid given growing recession and a sturdy dollar. So the smallest supply increase in history didn't appear all that material. Still, when fused with US demand destruction implied in the inventory data, Oil traders were quick off the mark to trim long and re-establish short positions.

The weekly inventory report shows crude oil inventory was down 223k bbl due to a 4.7 mn fall in SPR inventory last week. Excluding SPR, commercial oil inventory was actually up 4.5 mn. End-product stocks were mixed. Jet fuel and gasoline inventories were higher by 1.5 mn bbl and 163k bbl, respectively, but distillate was down 2.4 mn. And as expected on this type of data WTI and RBOB futures fell quite hard after the data release due to inventory buildup.

The refinery utilization rate fell another 1.2 percentage points last week to 91%, the lowest since May. Traders will surmise the fall in utilization was triggered by a decline in consumer demand. Typically we only see a fall in utilization at this time of year due to a major hurricane on the Gulf Coast, of which there have been no active storms.

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