Wednesday, February 10, 2016

Markets drift lower after oil inventory report

Dow dropped 99, advancers over decliners 5-4 & NAZ added 14.  The MLP index went up 1+ to the 213s the REIT index gained 1+ to the 292s.  Junk bond funds fell back & Treasuries advanced higher after today's auction (see below).  Oil was lower (see below) as was gold.

AMJ (Alerian MLP Index tracking fund)





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CLH16.NYM....Crude Oil Mar 16....27.33 Down ...0.61  (2.2%)

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Treasuries fluctuated after an auction of 10-year notes drew the lowest yield since 2012 & as Fed Chair Janet Yellen stuck to her call for gradual interest-rate increases.  Shorter-dated notes declined while benchmark 10-year note were little changed with yields near the lowest level in a year.  Yellen said that market turmoil may deter the central bank from the multiple increases that officials have forecast for 2016.  Gov bonds are surging this year as turmoil in equity & commodity markets boosts demand for fixed-income assets amid concern that global growth is slowing.  Declining inflation expectations have supported longer-dated Treasuries, with the gap between yields on 2-year notes & 10-year securities falling to the lowest in more than 8 years.  Traders have pared bets on when the Fed will move again after policy makers in Dec.  The difference between 2 & 10-year note yields fell to the lowest on an intraday basis since Jan 2008.  A shrinking gap is known as a flattening yield curve.  The $23B of notes maturing in Feb 2026 yielded 1.73%, down from 2.09% at the previous 10-year sale last month & the lowest since a Dec 2012 sale that yielded 1.65%.  A gauge of demand known as the bid-to-cover ratio fell to the lowest since Aug.  3-year notes auctioned yesterday drew the least demand since 2009 as the securities were sold with the lowest yield in almost 2 years.  Treasuries have returned 3.4% this year.

U.S. 10-Year Sale's Lowest Yield Since 2012 May Diminish Demand


Russia's largest oil producer Rosneft said it will defend traditional markets & expressed doubts over any coordinated action by crude-exporting nations to curb output.  “Tell me who is supposed to cut?” CEO Igor Sechin said.  “Will Saudi Arabia cut production? Will Iran cut production? Will Mexico cut production? Will Brazil cut production? Who is going to cut?”  Venezuela has lobbied Russia, Iran, Saudi Arabia & other producers over its desire for a meeting between OPEC & non-OPEC countries aimed at a global agreement to restore balance to an oversupplied market.  Oil prices have collapsed to their lowest levels in 12 years after Saudi Arabia led OPEC to defend market share rather than cut production amid a global supply glut.  “We are working on preserving our traditional markets and we will supply those markets with oil in a competitive battle,” said Sechin, adding that his responsibility is to ensure shareholders don’t lose money as part of any talks on managing global oil markets.  Russia, which gets as much as ½ of its budget revenue from oil & gas, has signaled it would attend any meeting between OPEC & non-OPEC producers, should such a gathering occur.  After talks with the Venezuelan Oil Minister earlier this month, both Sechin & Russian Energy Minister Alexander Novak agreed to discuss cooperation on global oil markets.  Rosneft is taking a wait & see approach, but Sechin said the producers' policy has played into the hands of financial players willing to test prices even as low as $10 a barrel.  “What is this other than an invitation to an irresponsible game in which there are no limits to falling prices,” he said.  Middle Eastern producers support an excess of supply to keep prices depressed & hurt the profitability of shale drillers in the US, Sechin said.  The spike in shale output in the 3 years thru 2014 won't happen again, he said.

Russia's Biggest Oil Producer Skeptical on Output Deal With OPEC


Oil prices pulled back even as weekly data from the Energy Dept showed a surprise decrease in crude-oil stockpiles.  It said crude-oil inventories declined 754K barrels in the latest week.  Analysts expected an increase of 3.7M barrels & the American Petroleum Institute had reported a 2.4M-barrel rise in crude supplies.  The report is a widely watched measure of supply & demand, & a drawdown on stocks would signal higher demand or lower supplies than expected.  A 1.1M-barrel drop in imports for the week that likely caused the decline in supply.   Light, sweet crude for Mar delivery settled down 49¢ (1.8%) at $27.45 a barrel after rising as high as $29.22 after the report.   Brent recently traded up 76¢ (2.5%) to $31.08 a barrel.  Despite the drawdown on crude, total oil stockpiles did still grow last week, according to the EIA, because of increases to both gasoline & diesel storage levels.  Both grew 1.3M barrels, compared with expectations of a 900K-barrel decline for distillates & just a 1M-barrel increase for gasoline.  Total stocks of crude & its products have now increased in 11 out of the last 14 weeks.  It is expected that kind of oversupply will persist for months, keeping prices low. 

Oil Retreats Despite Surprise Drop in Inventories

The bulls lost control over the market in the PM.  Janet's words, which added little new to analysis, faded & worries about too much oil supply brought back sellers.  These are tough times in stock & commodity markets with no sign of relief in sight.  NAZ (the tech sector) which is vastly oversold had a minor rally.

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