Oil Rallies Despite Global SPR Release

Okay, very good morning to you. It's Wednesday, 24th of November. Hope you're doing well. And a couple of things we're going to cover, starting with the look at crude oil. We've got a chart here I'll come back to in a moment, but we had the SPR tapped predominantly by the US, but other nations as well. And actually, instead of oil moving lower, it actually moved up and had its biggest move, uh, north in 2 weeks. So we'll look at the rationale behind there, and there's some good comments as well from the analyst at Goldman Sachs about what they have to say about that latest deal. And then we're going to talk about the Turkish lira in freefall yesterday, fell as much as 15%. The reasons why. And then the RBNZ overnight, they came out and hiked rates now for the second time, rates now at 0.75%. But their currency actually moved down in overnight trade. And again, I'll go into explain why that price reaction occurred. And then we've got an update from Elon Musk. He's now halfway through or so that Twitter poll that he put out about the 10% disposing of his shareholding. And so we'll have a look at what the latest is on that front. And then we'll talk about the day ahead. Obviously a really busy day, all very much concentrated today in terms of US economic data this afternoon London time. And that's because US markets of course are closed for Thanksgiving tomorrow. Early electronic closes as well on Friday, meaning that most US participants won't come back then after today until Monday next week. So we've got things like US PCE, which obviously very closely watched given inflationary focus at the moment and on the coat tails of that multi-decade high in CPI. We've also got US GDP second reading, we've got new home sales, we've got jobless, we've got durable goods. So everything's coming out as well this afternoon to look forward to. But quick reflection on the charts, I'm not going to go into any of these in great detail really because it's a fairly quiet open. Major currency pairs top left are basically flat and equity indices are pretty much unchanged. Just consolidating largely in the overnight session from where we were trading at the close on Wall Street last night. The S&P and Dow finished up 0.2% and 0.6%. Slight underperformance once again in the NASDAQ, down 0.5%. So continuation of a bit of that tech weakness is what we saw upon the nomination of Powell and the high-yield movement at the beginning of the week still being digested for the moment. European shares actually nursed the worst losses yesterday. They slumped to a 3-week low. Biggest daily loss we've had in nearly 2 months. And of course, a lot of people bit apprehensive about the resurgence of COVID-19 cases in the mainland, and that's raised fears of tighter restrictions which are being enacted at the moment across Europe, and the impact that will have subsequently on economic activity being kind of reflected in price. But I guess the one chart to look at is crude oil, and as you can see here, this captures the sell-off that we had on the trendline break on Friday as people were anticipating the fact that the US were getting more serious about tapping the SPR. And then the announcement itself came out yesterday, and in fact, prices moved higher, biggest gain that we've had in 2 weeks for WTI crude, on the basic notion that the deal that they done was smaller than many had expected. And so the US will make 50 million barrels of oil available to buyers. And as such, then prices, given that we'd already factored in something more sizable, a lot of banks were talking more like 80 to 90, this obviously is way smaller, which in itself I think is again very much more Biden pushing this through. It's going to have, I think, a very minimal impact in fact on, on the performance of crude oil, but that's probably not the point. The optics will appear at least that he's managed to do something for the consumer to manage then heightened energy prices, which of course are having a really meaningful impact to lift energy price, um, inflation at the moment, which is a real headache for him politically, domestically. So we're back at a $79 handle at the moment, holding on to some of the gains that were seen yesterday. The next thing that people will look out for, of course, when it comes to now oil going forward is what's OPEC's response going to be And they're not going to have to wait long because OPEC are meeting next week, as they always do on a month-to-month basis. And speaking before the reserves release were announced yesterday, a member from the UAE came out and basically said there was no need for OPEC+ to increase oil production any faster than their predetermined plan, despite pressures that they're getting from other consumers at the moment. And if anything, what's happened US-led yesterday with the tapping of the SPR is it's probably even put even more friction between, say, the US and Saudi and other, like Russia, participants of OPEC+ at this point in time. But Russia, of course, has got this whole other angle as well at the moment of a source of friction over Ukraine. Lots of military movement happening, military drills in the Black Sea about whether or not they'll look to invade Ukraine and so on. You know, if you want to read about the likelihood of that and why that's happening, If you just go to my Twitter account, I shared a really good breakdown of that from a Reuters article late last night if you want to have a read. But one of the things here about this, this latest move, the reason why I call it more political optics than something more meaningful to really move the needle on the supply side of trying to counteract high oil prices at the moment, a couple of things. For one, this is a bit of a look at going back in time to 2008. And again, you can access this chart on my, my Twitter account. But this is looking at the last times over the recent years that the US has basically tapped the SPR. So it marks all releases of at least 1 million barrels since 2007. And you can see more often than not, prices do tend to respond, but that isn't always the case. In fact, when they did this back in 2017 and they released 5.2 million barrels, actually prices went, went up. And so that's not always the case that it has the intended kind of impact. This is actually the top sheet of a research report that was put out from Goldman Sachs shortly after the announcement yesterday. And they were writing that— so going by the numbers, the US have released 50 million barrels with the US, from the US, as much as 30 million barrels from Korea, Japan, China, India, and the UK. And what they're suggesting is then the aggregate size of the release is 70 to 80, and that was both smaller than the 100, 100-plus that the market had been pricing in. And this is one of the important things we were talking about at the beginning of the week. The swap nature of most of these barrels implies an even smaller circa 40 million barrels net increase in oil supplies over 2022-23. Because one of the things here is that actually it needs to be the oil returned back with interest. And so actually when you factor that in, this latest supply increase is absolutely insignificant in the grander scheme of things. And hence the reason why the market was quick to jump on this and fade the initial knee-jerk headline reaction lower and then just rally the market back up. On the back of that. Okay, the other thing then is the Turkish lira. Um, just for interest, I'm just going to give you a very brief overview because if you go on to the YouTube homepage for Amplify Me and you go down to the latest videos, which is the one, the category where every daily one gets uploaded, Eddie and I did a video yesterday about why the Turkish lira is in freefall Really good conversation, had some nice interaction with this post. So he goes into it, Eddie does, in a lot more detail, given the backstory of the history, how we've got to this point, why it's been kind of blown out in a latest catalyst by the convergence of really Erdoğan, the president, pushing back, defending his recent sharp rate cuts. To give you an idea of top-level numbers, interest rates around 15%, whereas inflation is tracking at 20% in Turkey. He doesn't look like he's going to back down from that. And all the meanwhile, while the domestic currency weakens, the dollar is strengthening under the more hawkish tilt now we're hearing from Federal Reserve officials, which is creating further downside pressure for the Turkish lira. So yeah, check, check that out. The lira's absolutely hammered yesterday. It was down as much as 15% at one point. The lira's 11-day losing streak is now its longest it's had in 20 years. And it just really was an acceleration of what has been a pattern of several years of declining value for the currency. But in November alone, to give you some context, the Turkish lira has lost a third of its value now. So yeah, although we might fade a bit of the aggressiveness of the move yesterday, given the fact that Erdoğan is probably unlikely to back down, could be one to continue to watch, and it could get, um, it could get worse before it gets better. To that extent, the other thing then, just quickly to talk about, is the RBNZ. And the reason why is they became the first central bank amongst developed nations to increase rates for a second time in 2021. Rates were lifted by 25 basis points overnight and now reside at 0.75% in response to runaway inflation an overheating economy. You can see here that prior to the episode really of the economy starting to roll over a bit, and then of course the pandemic hitting, rates have gone from kind of circle 1.75% all the way down to the lower bound. And then we've had this 2-rate hike return more recently. In actuality though, the Kiwi dollar, although it spiked and saw some initial volatility on the release, I transition my screens here. This is looking at Kiwi, Kiwi futures. And as you can see here, the volatility on the release, and we've actually generally moved lower post that announcement, which might seem strange just looking on top level. This bank has just hiked rates for the second time this year, one of the only developed nation banks to have done so. The bank said they forecast inflation to run above 5% for the next 3 quarters, peaking at 5.7% in March because of higher oil prices, rising transportation costs, and the impact, of course, of supply shortfalls. The main rationale behind why the currency reacted in a negative way is that although they expect inflation to return towards a 2% midpoint of its target band over the next 2 years, they do see it moderating over time. The important thing of why it slipped to a 6-week low is that most people are actually looking for a more aggressive rate hike So although they've done a second one's been executed in the cycle, people actually thought just given the conditions, particularly on the inflationary side, that they were going to step it up and go for 50 basis points rather than 25, and that didn't materialize. And so we've just generally trended a little bit lower there overall. So that was the Kiwi side of things. And then very briefly, just an update on, on Elon Musk. Here's the chart of what he's pledged and the amount of shares he would need to sell to fulfill, um, that pledge of offloading 10% of his stake. So it came to light because all of this stuff needs to be filed, and so it's quite visible for markets to see. And Musk sold an additional 934,000 shares for about $1 billion according to regulatory filings, uh, late on Tuesday's session. He also exercised about 2.15 million stock options, and the sales were made to cover taxes related to the transaction. When he does execute these, he has to pay tax on it, which is why it becomes quite a tricky thing to manage when you're talking about such, such size. I've not actually looked directly at this to mark it up recently, but here's just a look at the general ebb and flow of Tesla shares. And in fact, you know, this is only really looking at the last 2 months or so of price activity. And you can see here we saw quite a sharp bounce here as trade recommenced for the beginning of the week, and we've actually faded that quite sharply. We ran into the kind of $1,200 a share as generally a bit of an obstacle, and since that point we've declined to the lows, around 11% from lows that were seen at the close yesterday on this latest filing. Um, you could say though that the magnitude of these sell-offs is getting smaller as the market kind of acclimatizes to him doing these share sales. I mean, if you look at that first one that we had, that was more like 16%, overall move of 20%. The move now, in fact, from the highs is more like 10% to 11%. So I would imagine he gets through the rest of this without really too much damage to the stock price. And overall, one of the key levels, of course, which has broadly held is the psychological $1,000 in the Tesla stock price. And we did have a brief foray beneath there beginning of last week, managed to see a really sharp recovery. So that's obviously quite a key lower bound level around $978. But for now, I think the, the impact will become a diminishing impact now that the markets are becoming less sensitive to these developments. But they still are having an impact, is the point. Um, so good for medium-term holders. I don't think it's a big issue what's happening now. For the intraday guys, yeah, you just need to have your wits about you to keep an eye on some of the news flow that's coming out. All right, in terms of the day ahead, so we've got German IFO coming out shortly this morning, um, and the headline figure expected at 96.6, so a slight move lower down from 97.7, but it's going to be an increasingly interesting figure to watch, I guess, going further forward, because it's only most recently that the COVID case rate in Germany continues to tick up quite aggressively, and then now continues to talk about more onerous restrictions, and the impact that that might have then for companies in particular and their confidence going forward will be key to watch. One would imagine this number will decline in time to reflect that, and, and probably today's number may be a little bit too early to really reflect that in full. And so something to just bear in mind. And then for this afternoon, yeah, super busy day for the States. As you can see, durable goods, second estimate Q3 US GDP, you've got PCE, weekly jobless, you've got University of Michigan, new home sales, oil inventories. And then don't forget, you've got the FOMC minutes as well. So not going to talk about everything, just a couple of the key ones. Of course, one of the big ones will be PCE. It's going to be monitored quite closely given the inflation focus, which has risen faster and to a higher level than perhaps the Fed officials were contemplating originally. And that then has contributed to this more hawkish developments in markets for rate pricing and subsequently in step with the shift in some of the Fed rhetoric of late. The PCE data reflects change in household expenditures. A subsection of that data, core PCE, which discounts the effects of volatile food and energy sectors, is the one that's going to be particularly closely watched. And that's expected to remain unchanged for Q3 at 4.5%. But definitely markets will, will pay close attention to that. The other thing we've got then is, is GDP. Analysts at the Dutch bank ING expect a modest upward revision but the October personal spending will be more significant as it tells us how the fourth quarter started. New home sales also coming out today, not expected to be, um, move much on the month, but increase in homebuilder sentiment suggests buyer traffic is on the rise, and that should lift housing activity going into the new year. And then finally, initial jobless claims expected to be tracking down at the kind of mid-200,000 level. Looking for it to be fairly consistent with last week. The oil inventories, um, obviously we'll look out for this afternoon, and then the market's close, um, will happen, um, in terms of Thursday sessions. So it's going to be a very jam-packed day, and then it's probably going to be very quiet, barring anything unexpected, for the rest of the week. Although there might be some electronic trade happening, actual volume will be very small stateside. Then you've got the FOMC minutes, of course, last thing just to wrap up. This is from that meeting where they really commenced tapering. And so a lot of people might scrutinize the actual line-by-line account of those discussions. However, I guess the key thing markets are looking for at the moment is what would constitute and what type of progression would need to be seen and how would it, how would it look in terms of a speeding up of tapering. It's probably way too early to see that have materialized in the minutes that came out because this was about the launching of, not now where the discussion is at in markets right now, what, 2 weeks or later after the event, 3 weeks later where the narrative has moved now. And so for me, the minutes are perhaps a little bit dated and I wouldn't actually be looking for too much to come out of them, to be quite honest. All right, that is it from me. Um, again, any questions at all, feel free to drop me a comment. Um, hope that was useful, and I'll see you guys tomorrow. Thanks very much.