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Tuesday, February 9, 2016
Lower markets on gloomy outlook for oil
Dow slid back 35, decliners over advancers more than 2-1 & NAZ went up 15 following its recent decline. The MLP index dropped 6+ to the 213s & the REIT index lost 2+ to the 293s. Junk bond funds drifted lower & Treasuries ran into selling. Oil was little changed in the 29s & gold gave up some of its recent gains.
The
global oil surplus will be bigger than previously estimated, increasing the risk of further price losses, as OPEC members
Iran & Iraq bolster production while demand growth slows, according
to the International Energy Agency. Supply may exceed consumption
by an average of 1.75M barrels a day in H1, compared with
an estimate of 1.5M last month, & the excess could swell if
OPEC adds more output, the IEA said. Iran raised production in Jan
following the removal of intl sanctions, Iraqi volumes reached a
record & Saudi Arabia also ramped up output. The agency trimmed
estimates for global oil demand. “With the market already awash in
oil, it is very hard to see how oil prices can rise significantly in
the short term,” the agency said in its
monthly market report. “In these conditions the short term risk to the
downside has increased." Oil
prices remain capped near $30 a barrel after slumping to a 12-year low
in late Jan. While prices recovered on speculation that the
Organization of Petroleum Exporting Countries might agree to production
curbs with non-members, “the likelihood of coordinated cuts is very
low,” according to the IEA. No agreement to restrain supply emerged last
week after Venezuelan Oil Minister Eulogio Del Pino toured oil capitals
from Moscow to Riyadh.
Production
from OPEC’s 13 members climbed 280K barrels a day last month to
32.6M, about 900K a day more than the
average required from the group in 2016. Iran expanded production
by 80K barrels a day to 2.99M in Jan after world powers that lifted oil sanctions. Iraq increased output by 50K barrels a day
to 4.35M & could raise that further,
which had predicted in Oct that the country would struggle to add
new supplies. Saudi Arabia, OPEC's biggest member,
boosted production by 70K barrels a day to 10.2M.
The
IEA lowered its estimates for global oil demand for last year & 2016,
by 100K barrels a day, leaving the level of growth for this year
unchanged at 1.2M to average 95.6M a day.
That growth is weaker than the 5-year peak of 1.6M barrels a
day reached in 2015, amid slowdowns in Europe, China & the US. Oil
inventories in developed nations increased in Dec, a month when
they normally decline, by 7.6M barrels to 3B. That left
stockpiles about 350M barrels above average.
German industrial production unexpectedly fell for a 2nd month in
Dec, a sign that a slowdown in major export markets is holding back
factory activity despite strong domestic demand. Output, adjusted
for seasonal swings & inflation, fell 1.2% from Nov, when
it declined by a revised 0.1%, data from the Economy Ministry said. The reading, which tends to be volatile,
compares with an estimate for a 0.5% increase. The pullback comes at a time when
record-low unemployment & low fuel costs are bolstering consumer
spending, but slowing growth in China & emerging market economies are
counteracting those positive trends to rein in production. It also came
amid a warm Dec, which could have driven down heating costs. Slowing demand from abroad has been a major headwind for industrial output in Germany. Growth in China is
expected to slow to 6.3% in 2016 from 6.9% last year &
7.3% in 2014, the IMF said last month. China is Germany's 4th-largest
export market. Total
foreign sales fell 1.6% in Dec. Imports declined 1.6% from the previous month. Slower
growth overseas may be weighing down companies' sentiment as.business
confidence fell for a 2nd month in Jan. German manufacturing output
slid 1.1%, driven by a 2.6% slump in the production of
investment goods. Energy production declined 3% & consumer
goods output fell 1.4%.
US small business confidence fell in Jan to its lowest level in
nearly 2 years amid worries about the near-term outlook for business
conditions & sales growth, consistent with a recent slowdown in
economic growth. The National Federation of Independent Business said
its Small Business Optimism Index fell 1.3 points to 93.9
last month, the weakest reading in 2 years. Still, small
businesses remained fairly upbeat about the labor market. The NFIB said there was little sign that a stock
market selloff & Dec's interest rate hike had impacted confidence. Owners'
perceptions of business conditions in 6 months weakened sharply as did
their views of expected sales. "These expectations are important determinants of
decisions to hire, to expand business operations and to order new
inventory, all drivers of economic growth," the NFIB said. The ebb in confidence mirrored other weak economic
data ranging from manufacturing to consumer spending & trade. Despite the downshift in sentiment & weak economic
growth, small businesses are not scaling back on hiring & continue to
report a shortage of qualified workers to fill job vacancies. This is prompting businesses to start raising wages
to attract & retain workers. The share of small businesses raising
compensation increased to its highest level since 2007. With the sales outlook weak, businesses continued to
hold back on increasing inventories last month & offer price discounts
to clear stock from their warehouses. "It appears that there was a lot of price cutting late in the year to boost sales and reduce inventory," the NFIB said.
This is just another dreary day in the stocks. But major losses in pre market futures have been trimmed with a modest amount of bargain hunting. The outlook for oil is not pretty & that is adversely affected by slowing growth in China which hurts economies around the globe. Dow is flirting with holding above 16K, nothing to be proud of.
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