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May 16, 2024 | WTI Breaches US$77/B on Weaker US Demand and Growing Inventories

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.

Market bulls jumped all over the bond and stock markets on the tepid CPI report today. They have renewed the call for the Fed to cut rates at their September FOMC meeting. We suspect this is premature as PPI data was disconcerting and blew past forecasts. The CPI today came in at 3.6% year-over year, in line with estimates and below the last data point of 3.8%. Cheaper airfares and hospital prices helped this decline. On the other hand, the core PPI data released yesterday, showed a sharp rise of 0.5% for the month (forecast was for a rise of 0.2%), an annualized rate of 6.0%. Final demand for services saw a rise on an annualized basis of 7.2%. This will likely mean each new economic data point will get more scrutiny.

Some of the other new data points include:

  • US Manufacturing is slowing with the NY Empire State Manufacturing Index for May coming in at a minus 15.6 compared to a forecast of minus 9.9.
  • US Retail Sales came in flat versus a forecast of up 0.4% and a prior reading of up 0.6%.
  • US Consumer Sentiment is falling sharply according to the University of Michigan survey. It fell to 67.4 from a forecast of 76.2 and was down from 80 just a few months ago.
  • Canada beat on its job data for April, coming in at an increase of 90,000 jobs roughly 20,000 higher than forecast.
  • The US – China tit for tat continues with President Biden putting on higher tariffs (US$18B) on their electric cars, solar panels and semiconductors.  The 100% tariff rise for EV’s is ridiculous as the US does not import EV’s from China. It was a political gift to his auto union supporters.
  • China is seeing more weakness in their business activity. MSCI China companies saw a 5% drop in sales in Q1/24.

On the wars front:

  • The chance for a ceasefire and hostage release deal between Israel and Hamas has deteriorated with Israel’s move into Rafah to destroy the last of the Hamas terrorists.
  • The US which was against this incursion have halted munition shipments of large bombs to Israel. Israel has noted that the US pressure will not halt their intention to end the Hamas threat.
  • Hezbollah has daily increased Katyusha rocket salvos into northern Israel. Large wildfires are being reported across the area of the agricultural heart of Israel. Whole swaths of land are on fire.
  • US campuses remain a focus of protests by those supporting Hamas and the Palestinians. Blue States are having the worst of this.
  • Russia is expanding its offensive to capture the second largest city in Ukraine, that of Kharkiv in eastern Ukraine and near the Russian border. It is Russia’s largest offensive since the start of the war in February 2022.

Market Update: The general stock market has lifted in recent days as MEME stocks rocket higher as the Reddit chat lines get neophyte investors to chase stocks no matter the lack of value. Gamestop (GME) and AMC Entertainment (AMC) had two or three days of rocketing upwards and today are backing off. Front runners win and the lemmings are being shafted. GME, which rose from US$17 per share to US$64.83 per share in three days, is down today as I write this, by over 30% to $33.94 per share or down US$14.81 per share on the day.

The general consensus of bullish stock market investors is that the Fed will cut rates in September and that earnings will hold up justifying much higher levels for the indices. If earnings become problematic as we are seeing from most of the S&P 500 (except for the AI, M7 and FAANG names) then stocks have a lot of air in them.  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.

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 287 (now 292). 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 70% today. 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 16th, 2024

Posted In: Schachter's Eye On Energy

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