US oil jumps on removal of ban

US oil, commonly measured by the WTI crude, is now trading at a premium over the international oil prices, Brent, as market participants cheered the Congress’ approval for the removal of the 40-year ban on US crude exports.

Oil Barrels
Source: Bloomberg

Now, WTI is trading at $36.50, around 35-40c higher than Brent’s $36.10.

However, the fundamentals in the oil market remains quite bearish, as the US oil rig count is starting to increase, and US crude inventories remain around 130 million barrels above its five-year average. Coupled with the high level of supply from OPEC members, the oversupply is set to continue into 2016.

While the lifting of the US ban on crude exports is encouraging, the same low prices which prompted the US lawmakers to consider abandoning the restriction would reduce the short-term economic impact. This is simply because the global oil market is saturated. Even if US oil producers are able to compete with international producers, there may not be enough demand to go around.

One other thing to consider, China’s move to peg the RMB to a basket of currencies instead of the USD could also drive demand lower, as the yuan devalues and oil becomes more expensive domestically.

Nonetheless, 4% jump in WTI prices yesterday helped the US energy stocks rally. The S&P energy sector climbed 1.2%, which could also ease concerns about debt defaults. As a whole, US stocks also closed higher, which should induce some risk taking in Asia today, especially after a rather bruising December, stuffed full with central bank volatility.

 

Markets

  • S&P 500 and the Dow closed higher at +0.9% and 1%.This was assisted by a rally in the energy sector due to gains in WTI crude. Energy and materials were among the best performer sectors at +1.2% apiece.

 

  • In tandem with the rise in equities, treasuries came under pressure. US debt was also weighed by an upward adjustment to the core PCE to 1.4% QoQ from 1.3% previously estimated.

 

  • The USD index was broadly stable at around 98.0-98.5, which kept USD/JPY and EUR/USD.

 

Noble sold the remainder of its 49% stake in Noble Agri to Cofco for $750 million. With half of the price it was paid for the 51% it sold, also to Cofco in April 2014. However, it stands to benefit as much as $200 million from a future sale or IPO of the agricultural unit. The sale amount makes sense if you consider that agricultural prices have fallen about one-third since April last year, according to the Bloomberg Agriculture sub-index.

More importantly, the disposal helps the struggling company to raise the cash needed to avert a credit downgrade to junk status from S&P and Moody’s, and also to get rid of a liability relating to the subsidiary from Noble’s accounts.

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