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September 20th, 2019

Soaring Oil

By PRATTE

Pétrole EN

Soaring Oil

Oil prices influenced the markets this week as the attack on oil installations in Saudi Arabia boosted oil price on Monday. This week’s blog will focus primarily on this sudden surge in prices that finally stabilized in the middle of the week. Here is what happened this week in the markets.

Market Brief

A drone attack on oil installations in Saudi Arabia caused a rather difficult start on Monday for the markets, making oil prices go up. As a result, the market is facing “the largest single disruption in oil supply in history,” says Ipek Ozkardeskaya, an analyst for London Capital Group. In London, the price of oil jumped by 20% at the opening of the day. This increase caused significant disruption on the various stock exchanges. The Dow opened down 70 points, the NASDAQ fell by 0.5% and the S&P 500 lost 0.3%. Stocks from major airlines were directly affected by the sudden rise in the price of black gold. Airlines JetBlue Airways and United Airlines both lost 3%, while American Airlines declined 6.5%. The top three US indexes ended the session lower. Stocks from big oil companies have benefited from the oil boom; Marathon Oil Corp gained 11.6%, Occidental 6% and ExxonMobil 1.7%.

Wall Street was down again on Tuesday as investors remained cautious regarding the outcome of the Fed’s monetary policy meeting on Wednesday. Oil was down 6% on Tuesday as Saudi oil production could return to normal faster than expected. The three major US indexes managed to close Tuesday’s session with slight gains as investors positioned themselves before the Fed’s meeting. US markets fell back on Wednesday as investors remained alert to the Fed’s much-awaited decision. The Central Bank announced midday that it would lower its key rate by a quarter of a point, in the range of 1.75% and 2%, as expected by investors. The Dow ended the day up 36 points, the S&P 500 advanced 0.03% and the NASDAQ fell 8 points.

On Thursday, tech stocks rallied, boosting the three US indexes. Microsoft, AT&T, Facebook, Amazon and Alphabet were all up at the open, despite the recent decision of the Federal Reserve. The markets ended the session lower on Thursday, the Dow lost 0.19% pulled down by Walt Disney (-2.6%) and Boeing (-0.5%). Stocks rose slightly on Friday, pushing Wall Street closer to record highs set earlier this year.

The TSX, meanwhile, kicked off Monday’s session in strength, helped by rising oil prices allowing energy stocks to accumulate several gains. The Canadian index continued its good performance throughout the session, ending the day with gains of 69 points, approaching the 17,000 mark. “Canadian energy stocks were cheap before this weekend’s attacks in Saudi Arabia and are still a great buy,” said BMO Energy Research Manager Randy Ollenberger. Energy stocks recorded many gains on Monday session; Baytex, Encana, Meg, Enerplus, Canadian Natural Resources, Cenovus, Vermilion, Whitecap and Nuvista all earned between 11% and 17%. Tuesday, after a difficult start, the TSX resumed tone around 10 a.m., with a rise of 25 points. Following the oil drop, the energy sector lost 2.5% after a 9% increase the day before. The Toronto index continued its momentum and finished with gains of 83.44 points to close at 16,834.75 points, reaching a new closing record. The materials sector was the big winner of the day. Barrick Gold and Kinross Gold gained more than 5% at the end of the session. However, the energy sector continued to decline in the face of falling oil prices while Encana lost 6.5% and Crescent Point Energy was down 5%. The TSX opened lower on Wednesday, driven by the energy (-0.7%) and materials (-0.6%) sectors. This drop continued throughout the session, yielding 1.5% at the end of the day. The Toronto index hit a new high at the opening and at the closing of the session on Thursday pulled up by the materials and financial sectors. The same scenario on Friday, as the TSX hit a record high in a broad-based rally, helped by gains in the energy sector.

Oil

A drone attack on the Abqaiq plant in Saudi Arabia, the largest oil processing plant in the world, reduced in half the oil production of the country. “The attack has cancelled about half of Saudi production, about 5% of world production,” said Craig Erlam, Oanda brokerage. At the opening on Monday, prices had jumped 20% in London, its biggest intra-day percentage gain since the Gulf War in 1991. Light sweet crude, meanwhile, jumped 14.7% in New York at the end of the day. Rising oil prices are coming at a bad time as the global economy is already fragile and geopolitical tensions are on the rise. Saudi Arabia is the world’s largest oil exporter, producing 10% of world production.

On Tuesday, oil prices retreated at the opening of European markets. “There is not the same momentum for oil prices today for two reasons: first, slow global growth because of the Sino-US trade conflict,” said Thinkmarkets analyst Naeem Aslam. “Two, rising oil prices will likely trigger fears of a recession again, as high prices are negative for economic growth,” he continued. Despite this decline, oil prices remained near their highest level in two months.

Oil was still falling on Wednesday after Saudi Arabia announced full production at Khurais will be reached before the end of September. “Prices are almost back to the level they had last week, before the attacks,” said Robert Yawger of Mizuho. This decline continued “When it became apparent that the possibility of military intervention was diminishing,” said Yawger.

However, Saudi Arabia announced Thursday that it expects to return to a normal rate of 12 million barrels a day in November. “These plans suggest Saudi Arabia will have no spare capacity for at least the next two and a half months and therefore no way to absorb any further shocks,” consultancy Energy Aspects said.

Thus, this decrease in supply has blurred the cards Thursday, raising oil prices. Thursday morning, the Brent North Sea barrel was worth $63.95 in London, an increase of 0.55% over Wednesday’s close. In New York, the US barrel of WTI for delivery in October was trading at 58.33 dollars, up 0.38% from the day before.

Oil prices were up again on Friday, on track for a weekly gain of over 7%, heading for their biggest weekly rise since January.

US Federal Reserve

The central bank announced Wednesday that it lowered its key rate by a quarter point to settle in a range between 1.75% and 2%. A decision that was not unanimous in the committee. “Since the July meeting of the Monetary Policy Committee, the data received indicate that the labour market remains strong and that economic activity is progressing at a moderate pace. Job creation has been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending is growing at a steady pace, business investment and exports have declined. Global inflation and inflation for products excluding food and energy, on an annual basis, are currently under 2%,” reads the statement issued by the Fed. “The decision supports the committee’s goal of supporting the expansion of economic activity, a strong labour market and 2% inflation,” the Fed added.

The Central bank has injected four times this week liquidity in the financial markets. It started on Tuesday at $53 billion in liquidity, then 75 billion on Wednesday, Thursday and Friday, through an overnight repo operation. The last time the central bank had to make this intervention was during the financial crisis in 2008. For a third day in a row, the US Federal Reserve injected additional liquidity to ensure that it can finance the request for issuance of treasury bills as they are financed by the money market. It had seen its rate rise by 10% for a few moments earlier this week, due to the temporary lack of liquidity, forcing the Fed to act. . The Fed announced Friday that it would continue to inject liquidity into the market until October 10.

 

 

Pratte Portfolio Management is a firm registered with the Autorité des marchés financiers (AMF) and the Ontario Securities Commission (OSC).
Intended to provide general information about markets and securities and not to meet your specific needs, this report is the result of the author’s only work. The opinions (including any recommendations, if any) expressed in this report are those of the author only and do not necessarily represent those of Pratte Portfolio Management and do not constitute securities investment advisory activities designed to meet your specific needs.
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