Despite the pronouncements by a chorus of Federal Reserve officials thatnow is the time is to raise interest rates, the data does not seem to support that position. Yesterday’s ISM non-manufacturing data was case in point as it posted at 51.4--the worst reading in 6 years. If you couple that with Friday’s disappointing employment number and the ISM manufaruring data that shows U.S. manufacturing in contraction, it seems the Fed will be either frustrated or flummoxed as the case to raise rates does not jive with the data.
Overnight, John Williams, the president of the Federal Reserve Bank of San Francisco, said you have to look at the big picture--like an improving jobs marke--and he warns of the risk of waiting too long. He says that the economy has climbed back to full strength and it therefore makes sense to move monetary policy gradually back too normal. Yet the Fed will not make friends if they decide to raise rates, and that puts the U.S. manufacturing sector, which is already contracting, and the non-manufacturing sector, which is the bulk of our economy, deeper into the hole. U.S. growth at 1.1% is still anemic and inflation is tame. The Fed keeps telling us they are data dependent, and the data does not support a rate hike.
As for oil, the weak ISM non-manufacturing number lent some support but not as much as it did for gold. Gold soared as the dollar plunged but oil was a bit more hesitant. Part of the reason was that oil already had a wild ride after jumping on Labor Day on news of a Russia and Saudi Arabia deal to work together to stabilize oil prices. That news caused a surge of buying but also skepticism that had traders selling the fact. The reason traders sold the market was because the details of the agreement were murky and could they do a deal without Iran. Does it mean they will freeze output or does it mean anything really? While many tried to discount the deal, I believe that this is a very big deal. An agreement by the two largest oil producers in the world to “stabilize” production will have some sway on prices and will have influence over the big pictures as well.
Even Iran is sending signals that a production freeze may not be out of the question. The Financial Times is reporting, “Iran will decide whether to join a production freeze once it has reached its pre-sanction level of output, according to a senior executive from its state-owned oil company.” The Financial Times quotes Moshen Ghamsari, director of international affairs for National Iranian Oil Company, as saying, “We are still below the production but we are close. Before sanctions we were over 4m barrels [per day] – 4.1m and 4.2m b/d. Now we are 3.8m b/d. If we have West Karoun available on time, then it seems we are going to match previous production. This, of course, is new production we did not have before.” The article also reads, “Mr. Ghamsari said the final decision on joining a deal to limit production would be made by Iran’s oil minister Bijan Namdar Zanganeh when Opec ministers on the fringes of the International Energy Forum in Algiers later this month.”
The groundwork has been played for production restraint and in a world of rising global demand, this is significant and is another sign that a long term bottom for oil is being put in barring any global financial calamities. Let’s face it, the Saudis won the production war. They, along with the Russians, have regained control of the global oil market. They have forced the world’s largest energy companies into record high debt levels and have forced them to cancel over a trillion dollars in oil projects. Oil discoveries are at a 50-year-low and the Saudis know where their oil is. While we will see some oil in the shale patch come back, it will not replace the large investments that were made by big oil in the past.
Traders are concerned about seasonal weakness and the glut of gasoline at the end of the driving season. Yet products are always high at the end of the oil cycle. Products saw a pop after the Houston Shipping Channel was closed. The Houston Chronicle reported that, “Authorities shut down parts of the Houston Ship Channel and suspended the Lynchburg ferry service for 15 hours after a fuel spill and fire occurred a few hundred yards from the Battleship Texas early Tuesday. The Coast Guard reopened the channel at 3:30 p.m. after an overflight showed that most of the fuel had burned up or evaporated. A crude oil tanker leaving dock just past midnight after unloading its cargo hit something, possibly a sewer pipe, according to the U.S. Coast Guard. It leaked as much as 90,000 gallons of light fuel oil that caught fire, burning for about 45 minutes and sending flames up to 200 feet into the air. The fuel, a low-sulfur marine gas oil, is comparable to diesel gasoline, officials said.” It appears we will see ships move but more cautiously.
Natural gas is weak on cooling weather but like oil, is very bullish going into winter. Use any weakness in natural gas and oil to position for a long term up move.