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May 30, 2024 | Total US Inventories Grew By 13.2 MB Last Week. Crude Prices Under Pressure

Josef Schachter

As a 40 year veteran of the Canadian Investment Management Industry, Josef Schachter has experienced several exceptional and turbulent global economic and stock market cycles. With his primary focus on the Energy Sector, Josef is able to weave global political, economic and monetary issues with current energy data into a compelling story of what's going on in the sector, what is to come, and why.

Bearish commentary from the Fed meeting notes and repetitive comments by Fed officials that they see no reason to lower interest rates in the near term has spooked markets. There have even been some officials saying that higher rates may be needed if inflation persists or goes higher. This is a big change from prior more optimistic pronouncements. The US 2-year yield has risen over 25 BP over the last two weeks from 4.71% to 4.98% yesterday. There are forecasters concerned that if the 2-year exceeds the 2024 high of 5.05%, on a close, we could see a stock market correction of some substance. The stock market is taking the hatchet to companies that show disappointing results. Yesterday Salesforce had results that annoyed investors with revenues missing guidance and the July quarter forecast much below street estimates.  The stock is down 21% today. The Dow fell 411 points yesterday to 38,442, and today is down 380 points to  38,061. Overall the Dow is now down over 2,000 points from the high two weeks ago at 40,077. The upcoming inflation data will be scrutinized to see if the direction of inflation and rates is now on the upswing once again.

Some of the new economic data points we are watching include:

  • The Fed meeting minutes of the April 30-May 1st meeting noted that “the recent monthly data had shown inflation was more stubborn than officials had expected at the start of 2024”. The minutes noted “the recent monthly data had showed significant increases in components of both goods and services price inflation”. Various participants mentioned a willingness to tighten policy further should risks to inflation materialize.
  • It appears that the US is experiencing a ‘selective recession’ as lower income consumers can’t cover the cost of living. CNBC noted that a recent survey showed that “over 70% of low-income consumers right now are saying that they are struggling to make ends meet”. A measure of this is that 11% of Americans are on Food Stamps. This is over 42M people.
  • One sign of growth is in the Manufacturing sector as the May flash PMI rose to a two year high of 54.4 up three points in a month. Another is that Durable Goods Orders rose 0.7% in April  versus a forecast of a negative 0.9%.
  • Recent US Treasury auctions have been poorly received and have traded above yields before the auctions. Too much paper is being thrown at the market and investors are balking at the low rates. Bond vigilantes want yields over inflation and bad news on that front means higher interest rates going forward.
  • This morning US GDP for Q1/24 was reported up only 1.3% and down from a 3.2% rise Q4/23.

On the wars front:

  • Crude oil’s war premium has expanded as Israel’s incursion into Rafah has caused substantial civilian casualties. Red Sea attacks on shipping have also picked up.
  • The US built pier has broken up in rough seas and less emergency food supplies are now getting to the desperately needy Gaza civilians. One problem has been that when supplies do get in, Hamas and gangs have taken the supplies from the agencies distributing the goods. The 2.5 million desperate civilians are not on the receiving end of much of this aid.
  • Iran has sent the Houthi militants in Yemen long range weapons that can hit targets in the Mediterranean, so more targets and areas for shipping attacks.
  • China has increased its military exercises around Taiwan and their media is getting the public ready for an invasion of Taiwan as early as next month.
  • Lithuania is planning to send troops to Ukraine for training purposes but Russia has warned that any NATO troops in their countries uniforms will be targeted. France already has mercenaries fighting in foreign brigades. Ukraine has used the newest long range weapons to strike Russian nuclear infrastructure. So far the attacks have been against a radar station at Krasnodar that monitors long range missiles. Knocking these out blinds Russia’s ability to see attacks coming and may make them even more paranoid about NATO’s intentions.

Market Update:  We are watching the economic data carefully as it appears that consumers are getting tapped out and this could drag down the economy at some point. The offset is the 6% US deficit and large war spending that are keeping some areas of the US, with hot economies.  The military industrial complex are happy campers these days.

Energy stocks peaked in early April as crude reached its high of US$87.67 on the mideast war premium expansion. The run from early February was very rewarding and the ideas on our SER BUY List for the most part did very well. We see the general market and the energy sector as vulnerable. A correction should occur and that would provide the next low risk BUY signal which we see occurring during Q3/24. The S&P/TSX Energy Index peaked at 308 in week two of April and has fallen today to a low of 295 yesterday. A downside target below 240 in the coming months is likely. The overbought condition can be confirmed from the S&P Energy Sector Bullish Percent Index which rose from 39% bullish in February 2024 to 91% three weeks ago. Recent weakness has pulled this Index down to 59% yesterday. Over 90% is an overbought reading. It  should decline below 20% to give off an oversold level and a BUY window once again.

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May 30th, 2024

Posted In: Schachter's Eye On Energy

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