WTI Oil Falls 7.1%: Record Long 12 Day Losing Streak

WTI Oil - Stocks Fall Again On Tuesday

Corrections continued on Tuesday. Positive comments on trade from Larry Kudlow and the fact that stocks are oversold didn’t prevent losses.

The oil market extended its record losing streak to 12 days with a bang. Catalysts of all this weakness continue to be questions about global growth. And also the hawkish Fed.

S&P 500 fell 0.15% and the Russell 2000 fell 0.26%. Tech stocks recovered slightly as the Nasdaq was flat. Even though stocks had wild swings and ended lower, the VIX fell 2.1% to 20.02.

CNN Fear and Greed index fell from 11 to 10. I think this short term indicator has opportunities to be correct during the coming bear market. But it will be difficult for buyers to capitalize on it. Upswings will be fierce, but short lived.

WTI Oil - President Trump Advisers Disagree On Trade War

Stocks rallied slightly this morning. President Trump’s top economic adviser, Larry Kudlow, strongly decried Peter Navarro’s recent statements on trade.

Navarro’s hawkish on trade. Meaning, his statements aren’t news unless he says something in favor of trade.

Larry Kudlow stated, “I think Peter very badly misspoke. He was freelancing and he’s not representing the president or the administration.”

It’s good to see Navarro doesn’t control policy. If that was the case, there would never be a trade deal. Personally, I still think there will be a compromise. Both America and China are helped by free trade.

WTI Oil - Energy Underperforms As Oil Crashes

The two best sectors were the financials and the industrials as they increased 0.59% and 0.45%. Energy sector was by far the biggest loser as it fell 2.39%.

Even though oil headed into the session down 11 straight days, which was a record, it crashed. WTI ended the session down 7.1% to $55.69.

That’s its lowest closing price since November 2017. It's also the biggest decline since 2015.

As you can see from the chart below, the 14 day RSI for oil is the worst in history. Usually, under 30 means a security is oversold; it’s at 13.08.

It’s important to remember in the summer the short position in oil was extremely low and longs dominated the market. This trade has completely reversed.

The latest negative for oil is a recent President Trump tweet. “Hopefully, Saudi Arabia and OPEC will not be cutting oil production. Oil prices should be much lower based on supply!”

He makes production cuts less likely. A lack of cuts and slowing global demand because of the weak economy are a recipe for declining prices. There’s no doubt the price will rebound in the near term. It's so oversold.

However, the intermediate term fundamentals are still weak.

This decline in oil has been helped by the strengthening dollar. Yet that wasn’t the case on Tuesday as the dollar index fell 0.7%.

Oil is helping to push the Bloomberg commodity index lower as it fell 1.84% on Tuesday. It’s now down 4.81% year to date and 3.61% year over year.

This indicates inflation may have peaked.

The chart below shows how oil prices will impact inflation. Oil is very close to where it was in November 2017. Meaning, its positive effect on inflation is gone.

Headline CPI can easily fall below 2% if oil stays where it’s at now. Oil at $70 will nearly be down 20% year over year if it stays at that price for a year.

Obviously, oil is already lower than that now. That means the year over year change will be even lower, meaning it will pull down CPI sooner.

WTI Oil - Treasuries Remain Stable

The 10 year yield is at 3.15%. It’s down from its recent high of 3.26%. But it’s still in the range it has been in since the start of October.

Real yields are holding it up as the breakeven inflation rate has fallen. The 2 year yield is at 2.9%. Meaning, the difference between the 2 yields is only 25 basis points.

Hiking rates into the slowdown will invert the curve. If the 2 year yield falls further, it will indicate the market believes the Fed is nearing the end of its hike cycle.

Latest Fed fund futures market shows there’s a 77.5% chance of a hike in December. That shows us the hike cycle isn’t over yet.

WTI Oil - Slipping Global Growth

We've recently been looking at the global slowdown in almost every recent article. The chart below supports this thesis.

It shows the composite leading indicators are weakening after peaking earlier in the year. This indicator has a great track record of predicting global industrial production 6 months in advance.

It’s not terrible, but it has gone from good to slightly negative which is bad in rate of change terms. Latest reading from September shows it was at 99.5. That is down from 100.3 last year.

China is at 99.3 which is down from 100.2 last year. India is one of the strongest economies as it is at 101.3 which is up from 99.4 last year.

France had a strong Markit PMI in October. But its leading indicator fell from 99.6 in August to 99.4.

WTI Oil - No European Recession Yet

As you can see from the chart below, the net percentage of fund managers in the Merrill Lynch survey who think Europe will fall into a recession is at the highest level in over 2 years.

It’s still fairly low, but it’s moving in the wrong direction. Italy will be the first to fall into a recession as its Markit PMI is below 50. This survey is in tandem with the one which showed about 30% of fund managers think the European sovereign crisis will get worse in the next 3 months. Only 10% think it will get better.

WTI Oil - Conclusion

The oil market is wildly volatile and should increase in the near term. In the intermediate term, this weakness shows us the global growth story is worsening.

OECD composite leading indicators support that narrative. The fact that fund managers mostly don’t think there will be a European recession shows us markets have a long way to fall before the negativity is priced in.

 

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1 Comment

  • John

    November 14, 2018

    Thanks for the update on oil, i am going to miss the wen night out. I will watch the show in the morning. john