Stairs Up, Elevator Down For Energy And Equity Markets

It’s a case of stairs up, elevator down for energy and equity markets as a broad selloff overnight wiped out all of last week’s gains in just a few hours. It appears there’s a bit of “buy the rumor, sell the news” in today’s big drop as the long-awaited congressional stimulus package was finally passed over the weekend, but it came with strings attached – most notably some restrictions on the FED’s emergency lending capabilities. 

The U.S. Dollar has had a strong rally as it appears the money printing press will now have to get more approval before cranking up going forward, which matters more to Wall Street bankers than the $600 checks being sent to lower-income earners elsewhere. The bright side of this phenomenon is it brings back one of our favorite news characters, the “Head-in-hands trader” who tends to make an appearance any time we get a big sell-off.

In addition, there’s a new strain of COVID reported in England, that has much of Europe and Canada restricting travel to and from the UK as a result. Fears that the new strain could offset progress made with the vaccines seems to be spooking markets, but some reports suggest that the vaccines are still likely to be effective against the new strain.

Given the huge run-up in process we’ve seen since Nov. 1, we could easily see another 10-15 cents of downside for refined products in a normal correction of that rally unless buyers are able to get prices back above the upward sloping trend lines soon. That said, we saw similar rounds of steady buying capped off by a large sell-off in June, August and September, and each time the market recovered the losses within a week or two. 

Money managers continued to add net-length across the petroleum contracts last week, enjoying the seventh straight week of gains. Their reaction to this selloff, the largest in nearly 2 months, may make a big difference in whether or not this ends up being just a correction, or the end of the line for the rally.

Baker Hughes reported a net increase of 5 oil rigs drilling in the U.S. last week. The Permian basin increased by 5, while the Eagle Ford, DJ and Woodford basins all decreased by 1, which were offset by gains in other smaller plays.  

The increased drilling activity is also registering on the Dallas FED’s Texas jobs forecast, as one of several positive leading indicators suggesting the employment recovery from the spring COVID collapse should continue through December.  

Add another refinery to the scrap heap: Portugal’s oil & gas company announced it would shutter the smaller of its two refineries (which has roughly 100mb/day capacity) permanently due to the impact of COVID, and the regulatory environment.

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