Oil Stockpiles Increase Sending WTI Down 4%

Oil Stockpiles - Another Small Decline In Stocks

Oil stockpiles and the stock market fell slightly on Wednesday. Probably because the rally to start the month made the market overheated. The market is waiting for economic news on Friday and the Fed’s decision on Wednesday to decide where to go.

Specifically, S&P 500 was down 0.2%, Nasdaq was down 0.38%, and the Russell 2000 increased 5 basis points. There’s a technical factor in play with the S&P 500 near its record high because there have now been 3 peaks around this level.

First was in January 2018, the second was in September 2018, and the 3rd was in April. I can’t see the market making a push substantially higher than those 3 peaks with economic growth being weak.

Details Of Wednesday’s Action

Oil Stockpiles - CNN fear and greed index fell from 36 to 34 as continues to be in the fear category which it has been in for a few weeks. I’m including extreme fear as part of fear in that statement.

Oddly, the VIX fell with the market as it was down 0.5%. Utilities sector was the biggest winner as it broke its losing streak by rallying 1.33%. My forecast that the utilities sector wouldn’t hit a record high until the 10 year yield fell below 2% is looking dicey as it is only 0.74% off its record. And the 10 year yield is at 2.11%.

2 year yield is at 1.87% as the 10/2 year curve looks normal. Inversion in the near term part of the curve can be fixed if the Fed cuts rates three times this year.

Biggest losers on Wednesday were the financials and energy which fell 0.95% and 1.44%.

Oil Stockpiles - The energy sector has had a weak year relative to the market as it’s only up 3.8%. That’s what happens when oil prices collapse because of increasing stockpiles and demand concerns caused by the risk of a global economic recession.

WTI oil fell 4% on Wednesday to $51.14 which is the lowest close since January 14th.  The EIA stated crude stockpiles were up 2.2 million barrels which missed estimates for a 481,000 decline.

As you can see from the chart below, U.S. commercial inventories are at 485.5 million barrels which is the highest amount since July 2017. They are 8% above their average for this time of the year.

Since the March 15th week, they have increased 46 million barrels or 10.5%. They are up 12.3% from this time last year. Much of the increase has occurred in the past 12 weeks.

Facebook Stock Falls

Oil Stockpiles - Facebook stock fell 1.72% on Wednesday because it was reported that CEO Mark Zuckerberg was probably aware of the controversial privacy practices that led to the Cambridge Analytica scandal in 2012.

This is all part of the FTC’s investigation into the company. I wonder if Mark Zuckerberg will personally face consequences or if they are exclusive to the company. It might be good for Facebook to get a new person to lead the company because Zuckerberg is viewed as not caring about privacy and pursuing profits at all cost.

Investors love when a company pursues profits, but hate negative consequences such as fines and public backlash. I think Facebook is about to enter a new era where it will be more heavily regulated. That’s not necessarily a bad thing if the company can keep eyeballs on its platforms.

Oil Stockpiles - Biggest Risks To The Global Economy In The Next 2 Years

The chart below shows Oxford Economics’ investor poll which asks people to cite what they think is the top global economic risk over the next 2 years. These results are surprising to me.

As you can see, the risk of a U.S. recession wasn’t even mentioned in Q1. I can’t see why that happened. I’m not saying there will be a recession in 2 years, but it should be considered a risk.

Investors came to their senses and 20% mentioned it in the Q2 survey. That can be considered good news if you’re a contrarian. However, in a slowdown it’s justifiable to worry about a recession. Unless you know the slowdown will end soon, it’s not a reason to buy stocks.

Chinese policymakers failing to halt the slowdown was the 2nd most popular choice.

Oil Stockpiles - If it seems like we have been talking about a Chinese slowdown for years, it’s because we have. The latest risk to China is the trade war.

Personally, I think Chinese growth is in a long term downtrend and the economy is in a cyclical slowdown which is exacerbating that trend.

As you can see from the chart below, Chinese car sales are in a disastrous collapse as yearly growth was -12.5% in May. Things have to be pretty bad for a double digit decline to be a sequential improvement.

Sales were down 16.6% in April. This is the 12th straight month of declines. At least June will have a much easier comparison than May.

Oil Stockpiles - The most popular risk cited in this poll was the global trade war.

Even though it was the most popular, its percentage dropped from the low 40s to the mid-20s. It lost share because of the recession answer gaining popularity.

However, I don’t think it has become less of a risk. I actually think it has become more of a risk because of the latest tariffs implemented in June. In early 2019, many investors thought a deal was coming soon.

Mostly because they took the Trump administration’s statements at face value.

Oil Stockpiles - Conclusion

The stock market is waiting for the retail sales and industrial production reports to tell us if 2% GDP growth in Q2 is or isn’t out of the question. It would be interesting to see what would happen if they are great because the bet on 3 rate cuts this year would be ruined.

Also, it would be odd for the Fed to provide dovish guidance with solid reports just coming out. To be clear, it is highly unlikely the Fed is hawkish and the reports are terrible, simply because the Fed won’t be hawkish.

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