Crude oil gains traction
Despite a rise in inventories, crude prices continue to gain ground. All three crude oil futures – Brent, WTI and Shanghai – have bounced from their lows of December 2018, up 16.13%, 20.17% and 15.03% year-to-date. OPEC’s group of 14 finally has the last word, as expectations of tighter supply is supporting prices. Recent sanctions made by the US against Venezuela’s oil giant PDVSA in order to cut President Nicolàs Maduro’s government’s main source of revenue remains a major disruption for US refiners, which count Venezuela as their third-largest supplier. Since American refineries require the use of both heavy (Venezuelan) and light (shale) barrels to produce gasoline and diesel efficiently, their output dropped by 930’000 barrels/day in January. A prolonged shortage of heavy crude would inflate oil prices, since refiners would have to either slow production or pay a premium for heavy crudes.
So we expect a rise in crude prices in the coming months. The real impact of supply shortages should not be felt on US oil inventories until spring, when production ramps up for the summer driving season. A trade truce between the US and China could have the opposite effect on oil prices, as Chinese consumption could take off, but not benefit of OPEC members. China’s engagement to increase US imports could also include crude oil purchases. Currently trading at 54.95, WTI is heading along 55.20 short-term.
Market confusion
US equity markets have recovered sharply since, however, headwinds remain. US stocks moved quickly from over-bought to over-sold, as investors’ worries over US recession, trade tensions and Fed tighter monetary policy faded. Federal Reserve Chairman Powell’s pivot from tightening to neutral/dovish has pushed stocks to regain 50% of losses. Still, we retain our neutral slightly defensive position: there are key uncertainties. Volatility has declined but remains well above 2017 levels. Investors should be prepared for normal volatility.
Corporate earnings provided little clarity. A renewed focus on results is likely to develop into realistic valuations. December data said 50% of CFOs believe the US economy would be in a recession by end 2019. Consumer confidence has fallen sharply. The average US consumer sees chaos in domestic politics. Unemployment remains near historically low levels and job growth remains strong. A strong bounce in mortgage applications suggests improvements in housing. These are mixed messages, so investors should remain vigilant.
