Oil

Crude oil closed back above $70 a barrel as storms, both real and politically, started to develop. Prices were on the rise after U.S. oil supply fell 2.6 million barrels this week, which raised even more concerns about the market’s ability to replace plunging Venezuelan oil production and Iranian exports that reportedly already are facing falling oil supply. Now, you get Mother Nature involved with more storm activity brewing out in the Atlantic, and you have a very bullish outlook.
I usually wouldn’t pay attention to stuff like this. I take it as negotiating bluster. But the world is changing and suddenly we have a time window change of direction where precious metals are suddenly strong and the Greenback can’t seem to right the ship. Sometimes big things develop out of little beginnings.
A strong close Friday confirmed that the Federal Reserve is still in the driver’s seat. The major takeaways from last week’s FOMC Minutes and Fed Chair Powell’s speech are that there are no signs inflation will run away, real rates have stayed suppressed and as long as uncertainties in international trade persist, the Fed will remain accommodative; this is a potent recipe for higher prices.
Crude oil is being driven by more plotlines than an afternoon soap opera. With upcoming sanctions on Iran, the Fed on pace for gradual interest rate increases, strikes in the North Sea and a big drop in the U.S. oil rig count (which fell by 9 rigs, the biggest drop since May of 201), there is enough drama for both the bulls and the bears.
China is buying our oil and that could be Iran’s worst nightmare. It seems that the Chinese trade talks went nowhere, but despite that fact, China’s demand for U.S. crude oil might rise anyway. According to Reuters “China’s Unipec will resume purchases of U.S. crude oil in October after a two-month halt due to the trade dispute between the world’s two largest economies.”
The S&P 500 traded perfectly down to major three-star support on Friday and stabilized. As beautiful as the technicals were, (discussed in the ‘Technical’ section below) the bounce from major three-star support caught a tailwind from positive news on U.S.-China trade talks. It was reported that they are paving a path to resolve the trade dispute by November.
Commodities tried to turn the corner on reports of low-level talks about a framework to end the trade war and this made everyone realize that perhaps some of the fears of the backlash from a trade war were overblown. China is feeling the pain of the trade war while the United States looks to be gaining. If recent trade trends continue, it is possible that the United States may find it harder and harder to lift tariffs.
U.S. benchmarks are off yesterday’s swing high and the S&P 500 is contained below resistance as the week looks to wind down. Geopolitics remain in the headlines and the White House said it will ramp up sanctions on Turkey after the country hasn’t released the American pastor from house arrest.
The dog days of August that have set in on the moves in the commodities have been exaggerated. While crude oil holds the 200-day moving average, after a major seasonal sell-off, the concerns about a serious demand slowdown are most likely overblown. Turkey, of course, is a major oil producer and Consumer. NOT! The fears of contagion, steaming from the stepped upped pressure from the Trump Administration, has been overdone. We are in the dog days, and oil bears have begun licking their chops, mistaking seasonal weakness for a major bear turn in the market.
Crude oil prices got slammed on fears surrounding the Turkish economy, ongoing concerns about China, and a big build in crude supply, but really a lot of what is driving the bus is the strong dollar. Not just the traditional inverse relationship that oil has with the dollar, but how this massive up move is impacting oil supply and demand.