The US equity market was weaker on Wednesday in response to falling energy prices. The S&P 500 and Dow fell 0.06% and 0.27%, respectively. On the other hand, NASDAQ rose 0.74% due to strong healthcare performance. Investors rotated from energy to pharma and biotech. Oil fell 2.3% due to increased US production concerns, despite a crude inventory draw by 2.5 MMbbls. European markets were also lower—the FTSE and DAX both fell 0.3%. Looking at futures today, US markets are flat. In Asia, the Nikkei rose 0.1%, while the Hang Seng rose 1.0%.
Oil prices fall 2.3% after moderate WTI inventory draw
While the EIA’s report at 10:30 AM EST on Wednesday indicated a moderate reduction by 2.5 MMbbls in crude oil inventories and a 0.6 million reduction in gasoline supplies, negative market sentiment didn’t change. Domestic oil inventories have fallen in ten of the last 11 weeks, but that hasn’t been enough for oil bulls. The market has been focusing more on the fact that oil rigs have risen 22 weeks in a row. Permian production in the US is rising on a weekly basis due to low breakevens.
WTI crude oil prices have fallen 22% since peaking in 1Q17 on higher US production—officially entering a bear market. Investors’ sentiment has been driven by lower-than-expected US gasoline demand, OPEC’s weaker-than-expected production cut (1.8 million barrels per day), and rising exports from Nigeria and Libya. Since the energy sector only accounts for 6% of the US equity market today compared to 16% two years ago, the impact of yesterday’s oil price drop wasn’t too severe for the S&P 500. If crude prices fall below $40 per barrel, there could be implications for high-yield credit spreads and inflation expectations. Lower prices could put pressure on insurance and banking stocks, which have large positions in corporate credit.
US shale energy company breakevens are in the $40-$45 per barrel range, which means that more declines in prices could put pressure on rig counts and profitability for shale producers and oil majors. While production levels might be hedged for 2017, many producers have failed to hedge most 2018 production, which could result in funding gaps. Capital markets might not be open for higher cost producers next year if prices don’t recover, which could mean another round of E&P bankruptcies in 2018. As a result, it isn’t likely that oil prices will persist under $40 per barrel if OPEC sticks to its promised cuts through March 2018.
The market will keep a close eye on rig count data to see the trajectory of US production at lower prices. The data will be released on Friday at 1:00 PM EST.
According to Market Realist analyst Gordon Kristopher, US crude oil inventories hit a peak of 535 MMbbls on March 31, 2017. Since then, US crude oil inventories have been on a downward trajectory. On the other hand, gasoline demand is lower year-over-year. To learn more, read US Crude Oil Inventories and Oversupply Concerns.
Big winners and losers
Big winners on Monday included La-Z-Boy (+22%), Winnebago Industries (+14%), CA (+13% on proposed deal with BMC), AMD (+11%), and Novocure (+10%). Big losers included Wipro (-50%), Chicago Bridge & Iron (-12%), Wildhorse Resource (-11%), NOW (-11%), and MRC Global (-10%).
There aren’t any major earnings announcements today.
Important economic releases today (Wednesday) include:
- Jobless Claims (8:30 AM EST)
- FHFA House Price Index (9:00 AM EST)
- Bloomberg Consumer Comfort (9:45 AM EST)
- Leading Indicators (10:00 AM EST)
- EIA’s Natural Gas Report (10:30 AM EST)
- Kansas City Fed Manufacturing (11:00 AM EST)
- Fed’s Balance Sheet (4:30 PM EST)