The United States Oil Fund USO plunged 5.3 percent Thursday, bringing its year-to-date decline to 14.3 percent. USO, the most heavily traded oil exchange-traded product in the U.S., is now almost 20 percent below its 52-week high, putting it dangerously close to officially being in a bear market.
The Organization of Petroleum Exporting Countries is again confounding energy investors. On Thursday, the cartel and other major oil-producing countries extended a production cut that has done little to bolster crude prices.
“OPEC announced it would extend cuts in oil output by nine months to March 2018 on Thursday, after November’s landmark deal failed to clear a global supply overhang,” reported CNBC. “The move, which was then ratified by non-OPEC producers, was the base-case scenario for the market and means the 1.8 million barrel per day supply cut will roll over until the first-quarter of 2018.”
Year to date, USO has added more than $125 million in new assets, but there are some signs traders are growing tired of the fund from the long side as USO lost nearly $15 million in assets since the start of the current quarter.
Making the long oil trade all the more difficult is that high U.S. oil inventories mute the impact of output reductions by OPEC and other countries, indicating that oil bulls need to focus on other factors.
“Chinese demand in addition to U.S. production (including Trump’s export policy,) is probably more critical to oil price formation so is likely keeping oil range-bound, even if the possible range is wide,” said S&P Dow Jones Indices in a recent note. “According to index history, oil could reach between $25–$85 dollars before setting record moves. As OPEC cuts and if U.S. inventories decline to low levels, oil prices may increase, so China may use their own reserves or shop around rather than purchase oil at a higher price, capping the high end of the price range.”
Capitulation And Rebalancing
Some oil market observers may argue that capitulation is near and that the market has digested most of the readily available bad news, but there are other factors that need to come into play to help oil rebound.
“In this period of market rebalancing, it seems opportunities are hard to find but the good news possibly is there seems to be more stability from the lower volatility, higher correlation and tight term structures. If it is underpinned by the fundamentals of a recovering oil market, there could be more upside than downside,” said S&P Dow Jones.
U.S. stock futures traded lower in early pre-market trade. Data on durable goods orders for April and Gross Domestic Product for the first quarter will be released at 8:30 a.m. ET. The University of Michigan’s consumer sentiment index for May is schedule for release at 10:00 a.m. ET. U.S. markets will be closed Monday for the Memorial Day holiday.
Futures for the Dow Jones Industrial Average dropped 38 points to 21,025.00, while the Standard & Poor’s 500 index futures fell 4.75 points to 2,408.75. Futures for the Nasdaq 100 index declined 8.25 points to 5,773.75.
Oil prices traded lower as Brent crude futures fell 0.37 percent to trade at $51.27 per barrel, while US WTI crude futures dropped 0.27 percent to trade at $48.77 a barrel. The Baker Hughes North American rig count report for the latest week is schedule for release at 1:00 p.m. ET.
A Peek Into Global Markets
European markets were lower today, with the Spanish Ibex Index dropping 1.01 percent, STOXX Europe 600 Index falling 0.52 percent and German DAX 30 index dropping 0.52 percent. The UK’s FTSE index was trading lower by 0.02 percent, while French CAC 40 Index declined 0.77 percent.
In Asian markets, Japan’s Nikkei Stock Average fell 0.64 percent, Hong Kong’s Hang Seng Index rose 0.03 percent, China’s Shanghai Composite Index gained 0.07 percent and India’s BSE Sensex rose 0.90 percent.
Analysts at JP Morgan upgraded Ecolab Inc. ECL from Neutral to Overweight.
Ecolab shares rose 0.77 percent to close at $130.31 on Thursday.
- Big Lots, Inc. BIG reported better-than-expected earnings for its first quarter and raised its FY17 outlook.
- GameStop Corp. GME reported stronger-than-expected results for its first quarter. However, the company reaffirmed its FY17 earnings outlook.
- Costco Wholesale Corporation COST reported better-than-expected earnings for its third quarter.
- Ulta Beauty Inc ULTA reported upbeat results for its first quarter and raised its FY17 outlook.
Wednesday, May 24, 2017
Jay Pelosky, the founder of Pelosky Global Strategies, highlighted something about the stock market’s 2017 performance that may be flying under the radar: It isn’t as great as it seems.
Speaking as a guest on “Bloomberg Daybreak: Americas” on Monday, Pelosky explained that the developed markets excluding the U.S. have seen their stock markets gain 15 percent since the start of 2017, which is even short of the 18-percent return emerging markets have shown. Meanwhile, the S&P 500 index is up just 6 percent — at time of publication, the SPDR S&P 500 ETF Trust SPY was up 7.15 percent year to date.
“The real question is not why has the S&P 500 held up so well, the real question is: Is the rest of the world starting to take the leadership baton away from U.S. equities?” Pelosky asked. “And that’s a big deal because these moves tend to last for years — not quarters, not months.”
Pelosky isn’t necessary optimistic that U.S. markets can regain its leadership position as a home for stock market outperformance, especially under the current political climate, which he dubbed “Trump troubles.”
Pelosky believes the current “Trump troubles” will first lead to “policy inertia,” which then leads to weak growth. As such, earnings strength will shift from one of the best in years to questionable at best and ultimately present a poor risk-to-reward profile for U.S. equities.
Pelosky continued that a poor risk to reward profile for U.S. equities could further emphasize America’s status as a market laggard, not a market outperformer.
Terrorism struck yet again in the United Kingdom. Two months after a terrorist drove a car into pedestrians on the iconic Westminster Bridge in London, authorities are saying a suicide bomber blew himself up at the conclusion of an Ariana Grande concert in Manchester.
22 Dead, 59 Injured, 13 Missing
According to the UK-based Telegraph, children are among the 22 people killed and 59 injured. The publication noted that the first confirmed fatality was an 18-year old Ariana Grande “superfan” who met the pop star in 2015.
Another 13 people remained missing when Telegraph’s report was published.
British Prime Minister Theresa May confirmed the terrorist nature of the attack and said, “All acts of terrorism are cowardly attacks on innocent people, but this attack stands out for its appalling, sickening cowardice — deliberately targeting innocent defenceless children and young people who should have been enjoying one of the most memorable nights of their lives.”
Monday’s attack marks the country’s worst terror attack since multiple bombs across central London killed 52 people.
ISIS To Blame?
Authorities have yet to confirm the identify the suicide bomber and any possible links to terrorist groups, including ISIS. But what is known is that the terrorist was not acting alone as a 23-year old man was arrested in South Manchester in connection with the bombing. According to a Times report at 8:09 a.m. ET, ISIS has claimed responsibility for the atrocity.
Members of the Organization of the Petroleum Exporting Countries and other oil producers are set to meet this Thursday to discuss extending output cuts. The current cuts, an output reduction of 1.8 million barrels per day for six months, were decided in November and implemented on January 1.
The cuts are expected to be extended by nine months under the urging of the Saudi Arabia and Russia, the world’s top two oil producers.
Early in the week, oil prices were up in anticipation of the meeting, in addition to oil stocks, including Exxon Mobil Corporation XOM and BP plc (ADR) BP.
On Monday, share prices took a dive, though, after the news that Iraq was resistant to longer extensions, but returned to pre-market levels when Saudi energy minister, Khalid al-Falih, flew to Iraq to gain its support for a nine-month extension.
A Brief Look Back
Volatile trades are to be expected in the coming week, but investors should be cautious of placing too much stock in any sharp movements in the near term.
Looking back at the week before and after the past five OPEC meetings, there doesn’t seem to be any trend in share price movement in the short term.
The weeks surrounding OPEC’s 167th meeting on June 5, 2015, and 169th meeting on June 2, 2016, highlight the vast different movements that can occur:
- The 167th meeting was preceded by a near linear drop in prices among top U.S. exchange-traded oil stocks.
- The 169th meeting was preceded by a drop in prices, which returned to their starting value just before the meeting. The following week saw a rise in prices, which within another week had lost any gains made.
After both meetings, oil shares saw large price shifts in the longer term — the six months following each meeting — bouncing between highs and lows differing by over 15 percent.
What To Keep In Mind
The OPEC meeting last December had a distinctly noticeable impact on prices due to organization’s decision to implement a production cut for the first time since 2008.
Investors should be wary of speculating based on past meetings; the only evident trend in their effect on oil share prices is that there is no trend.
Investors should also note that OPEC’s effect on prices is ultimately determined by its members’ willingness to abide by its decisions, and they should pay attention in the long run to see if the petroleum exporting countries stick to their obligations.
- Ascena Retail Group Inc ASNA 30.14% shares dipped 37.8 percent to $1.75 after the company lowered its Q3 and FY17 guidance.
- Endologix, Inc. ELGX 35.96% shares dropped 35 percent to $4.38 after the company issued an update on Nellix System US regulatory status. Following meeting with the FDA, Endologix will seek US approval by conducting a confirmatory clinical study with the IFU and Gen2 device design. Stifel Nicolaus downgraded Endologix from Buy to Hold.
- Stein Mart, Inc. SMRT 37.06% shares tumbled 34.7 percent to $1.11 after the company reported weak Q1 results and suspended its quarterly dividend.
- Gol Linhas Aereas Inteligentes SA (ADR) GOL 26.05% shares declined 23.4 percent to $11.76 on fears that another political scandal will result in the impeachment of President Michel Temer. Temer, who ran on a platform of economic reform, has been in office for less than a year, but a new report by Brazilian newspaper O Globo has accused Temer of paying off a potential witness in an ongoing graft probe.
- Banco Bradesco SA (ADR) BBD 18.73% shares tumbled 18.1 percent to $8.22 session. Stocks of US-listed Brazil-based companies seeing a substantial downside amid bribery allegations related to President Temer.
- Banco Santander Brasil SA (ADR) BSBR 20.48% shares declined 17.8 percent to $7.26.
- Companhia Brasileira de Distribuicao-ADR CBD 15.1% shares dipped 17.4 percent to $19.63.
- Itau Unibanco Holding SA (ADR) ITUB 18.24% shares fell 16.3 percent to $10.50 after dipping 3.28 percent on Wednesday.
- Gafisa SA (ADR) GFA 16.57% shares slipped 16 percent to $7.35.
- Companhia Siderurgica Nacional (ADR) SID 17.3% shares dropped 15.6 percent to $2.00.
- Companhia de Saneamento Basico (ADR) SBS 17.3% shares declined 15.7 percent to $8.48.
- Gerdau SA (ADR) GGB 14.58% shares dipped 15.2 percent to $2.71 after declining 3.19 percent on Wednesday.
- Petroleo Brasileiro SA Petrobras (ADR) PBR 16.57% dropped 14 percent to $8.85 amid bribery allegations related to President Temer.
- Banco Bradesco S.A. BBDO 16.42% shares fell 13.7 percent to $7.98.
- Pure Storage Inc PSTG 13.84% shares plunged 10.5 percent to $10.45. Morgan Stanley downgraded Pure Storage from Overweight to Equal-Weight.
- Teekay Corporation TK 8.06% fell 8.3 percent to $6.66. Teekay reported a Q1 loss of $45.3 million on revenue of $543.5 million.
- Cisco Systems, Inc. CSCO 7.61% shares declined 7.3 percent to $31.35. Cisco reported better-than-expected earnings for its third quarter, but issued a weak revenue forecast for the current quarter. Cisco also announced plans to cut an additional 1,100 jobs.
- ZTO Express (Cayman) Inc (ADR) ZTO 5.84% shares slipped 6 percent to $13.20. ZTO reported Q1 adjusted earnings of $0.10 per share on sales of $379.9 million. The company also named Hongqun Hu as COO.