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Oil rebound lifts markets

Falling volatility and trade volume marked the days prior to the Christmas holidays

Oil Plant
Source: Bloomberg

Following the conclusion of several central bank meetings, which without a doubt, the FOMC is the biggest of them all. There were not a ton of inspiration in terms of trading signals, and that’s that of funds and traders winding down before the end of the year. As I have also mentioned in previous notes, there could be risks of oil markets gyrations or developments out from China, which would nudge markets.

News and reports about oil acted as the fodder, and we saw Brent fall to an 11-year low, and WTI become more expensive than Brent. These affected oil-related equities, such as energy and materials, and to some extent utilities. Given the year-end thinner liquidity, the moves were exaggerated and outsized.

But if you look at the stock index on a longer timeframe, you would find that they are actually caught in a consolidation limbo. I think that’s going to continue until the year is over. In other words, there is not really a Santa rally, unless you count several days of gains as one.

Surely, the comments from China’s Central Economic Work Conference were positive for the global markets, since they suggested that Beijing is poised to do more to cushion growth, but the devil is in the details. What does a more ‘forceful’ fiscal policy actually means?

I’ve gotten quite a few questions regarding the oil markets, especially after several analysts felt that oil could go as low as $15 or $20 per barrel. I maintain my view that the fundamentals in the oil markets remain quite bearish, with the supply glut probably going to worsen as we enter next year. There is definitely room for more declines.

Therefore any bounces may be a chance to sell. Clearly, the next target will the February 2009 lows of around $32-34 for the WTI ahead of the $30 barrier.

 

Markets

  • The inventory report from the US Energy Information Administration (EIA) showed a downside surprise, as crude stockpiles fell -5.9 million barrels against the median estimate of an additional +1.2 million barrels. This helped to ease the markets’ concern over global oversupply. As a result, oil rallied, with the WTI still holding on to (and widening slightly) the premium over the Brent crude. They are now both trading in the $37+ space.

 

  • The bounce in oil boosted buying demand in energy and material stocks, amid thinner volumes. The SPX jumped +1.2%, led by energy (+4.2%) and materials (+2.4%), capping off a rise for the third day. That said, the index is still down -0.9% on the month, and trading volume on Wednesday was 16% lower than the 30-day average. The Dow added +1.1%. The US stock exchanges will close early on Thursday and resume trading next Monday, 28 December.

 

  • Miners and oil shares in European markets also benefited. The Stoxx Europe 600 index gained +2.7%, with the upmove seen across the board. The DAX was up +2.3%, and the FTSE 100 added +2.6%.

 

*For more timely quips, you may wish to follow me on twitter at https://twitter.com/BernardAw_IG

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