A Top for Crude Oil OPEC in Vienna

US equity markets moved incrementally higher and further into record territory in Black Friday’s abbreviated session with the Nasdaq, S&P 500 and Dow Industrials ticking higher. Volume, as expected, contracted from Wednesday’s light trade. For the week all three major equity indices posted gains. The Nasdaq led the way with a gain of 1.6% while the Dow Industrials and S&P 500 both tacked on 0.9%.

Economic data from last week was largely in line with or stronger than expectations. Leading Indicators for October came in at 1.2%, double expectation of 0.6%. Existing Home Sales for the month were a slightly stronger 5.480M versus 5.440M consensus. In something of an aberration from recent trend, Durable Goods Orders for the month contracted by 1.2%, reversing three months of gains. Weekly Jobless Claims, The Bloomberg Consumer Comfort Index and Consumer Sentiment all remained in line and encouraging.

This week’s economic calendar is significantly busier that last week’s. New home Sales (c. 620k) and the Dallas Fed Mfg. Survey are due out today. S&P Corelogic Case-Shiller HPI (c. 0.4%) and Consumer Confidence (c. 124.3) are released tomorrow. The preliminary Q3 October GDP figures on Wednesday are expected to reflect further acceleration. The prior reading was 3.0%. Bloomberg consensus has this reading at 3.3%. Motor vehicle sales, PMI Manufacturing and ISM Mfg. round out a busy week. There are 10 Fed official talks scheduled, 3 of which will be given by William Dudley. The most important of the talks will be given by outgoing Chair Janet Yellen on Wednesday at 10:00 AM EST.

Both retail sales, which proved to be significantly better than expected on Black Friday, and the expectations for a pending legislative push on tax reform, both played a hand in the day’s trade. On Thanksgiving Thursday and Friday, US retailers posted nearly $8 billion in online sales according to Yahoo Finance. Cyber Monday sales are expected to approach $6.5. Electronic games, entertainment appliances and laptops were aggressively marked down and sold in volume. Results from traditional brick and mortar retailers are expected to be very strong and will be available early this week.

While Washington DC gets closer to voting on tax reform legislation, voices in opposition have become increasingly strident. Even some of those expected to support the principle of tax reform are wavering in their support. In many respects, the tax reform legislative flight path is eerily similar to that of the ACA “Repeal and Replace” effort. Much of the run-up in equity prices that we have witnessed over the past several months has been predicated on tax reform success by the GOP. Anything that resembles a failure along the lines the GOP effort to unwind ACA would have negative consequences for equities.

Crude oil likely at the top of its range:

Given the methodical run-up in crude prices that has materialized in recent months, with WTI crude rallying nearly 40% since June and with it closing at a near two-year high on Friday at $58.95/bbl, energy focused investors have once again found themselves at a potential pivot point.

This Thursday OPEC is scheduled to meet in Vienna to discuss production, output and price modeling among other agenda items.
Given the significance of this meeting in conjunction with the dramatic price appreciation that has materialized in recent quarters, we are likely to see a modest pullback in crude prices this week as investors take some chips off the table as a way of mitigating a degree of risk heading into Thursday’s meeting.

The old adage “Buy on the rumor, sell on the news” comes to mind.

There are other reasons why crude oil prices may run-up against near term resistance. Specifically, the focal point of this meeting involves the current production agreement that is set to expire in March of 2018. That deal, as it currently stands, removes 1.8 million barrels of oil per day from global production. Though not expected, obviously any indication that the agreement will not extend beyond its current deadline would naturally act as a trigger for prices to move lower.

Other themes that could potentially negatively impact pricing for crude include the practical limitations of trying to convince non-OPEC producers of aligning their production schedule with OPEC’s. Historically over time these efforts have had little impact on the actual production of crude. Attempts at production compliance, a corner stone of the current agreement, have also proven not to hold over time. Ultimately the long term success of this effort by OPEC to tighten supply and support prices will be determined by factors outside its control.

That’s where US shale oil production comes into play. US shale oil supply has been extremely disruptive to OPEC control over global crude pricing over the past several years as we all know. Though with crude’s precipitous drop below $30/bbl shale oil became non-economic to produce, at near $60/bbl that changes. At these levels shale oil becomes a competitor to OPEC.

Given the stability energy prices have provided the global economy over the past two years and therapeutic impact they have had on inflation, policy makers and investors would ideally like to see current production goals extended. However, even if the current agreement is ratified and set as policy moving forward past March, crude oil will ultimately have to compete with shale oil at roughly $60/bbl. As a result the top end of crude’s range is likely near.

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Flickr photo: Istvan