Oil is Back in the Narrative

Without question, yesterday’s equity market intraday trade and narrative were driven by the reversal of fortune posted by crude oil – as I suggested would be the case in yesterday morning’s note. On Monday, crude closed the session at $37.90/bbl, up nearly 40% from the lows established on February 11th. Yesterday, crude reversed lower, losing 4.3% to close at $36.25/bbl. Yesterday’s trade lower in crude was fueled by two factors; global growth demand concerns as framed by China’s 25% decline in exports reported in the overnight and the reality of a supply response to crude’s 40% bounce in the past four weeks.

From yesterday’s note:

“My suspicion is that we see crude hit a wall sooner rather than later. Let’s face it, a 40% move to the upside, even from deeply compressed levels, will likely trigger some selling. Further, as the price of oil increasingly nears $40/bbl, you can be certain the efficiency of supply coming on line will be fierce. $40/bbl seems to be the widely shared price point at which the flood gates of domestic supply are opened.”

To my point…

Chevron announced yesterday that it intends to add two drilling rigs to the Permian Basin of West Texas in anticipation of a continuation in the rise of the price of crude WTI. Given the number of rigs in operation in the United States, even taking into consideration the sharp fall in count registered over the past 16 months, adding even two rigs is a sign that supply will be brought on line should prices dictate. Chevron also plans to reduce spending in the period in order to preserve its dividend, again as I suggested would be the case.

Needless to say, the energy sector was the leader lower on a day that saw equity markets fail in repeated attempts to continue to post yet one more day of gains. Energy (-2.19%), Industrials (-1.20%) and Financials (-1.19%) lost ground and weighed on the broader market. Just as energy was a leading sector over the rally of the past four weeks, the industrials and financials have also out performed to the upside. Yesterday we saw a bit of reversion to the mean.

The Nasdaq lost 1.26%, the S&P 500 slipped 1.12% and the Dow Industrials gave back 0.65%. Despite all that negative price action, markets did not register a distribution day as volume on both the NYSE (-7.32%) and Nasdaq (-5.87%) contracted. The market remains in a confirmed uptrend.

Flickr photo: oaphoto