Monday, October 15, 2018

Markets waver on uncertainties over Saudi relations

Dow was off 89, advancers ahead of decliners better than 3-2 & NAZ lost 66.  The MLP index slid back a fraction to 271 & the REIT index slipped a tad lower.  Junk bond funds inched higher & Treasuries were slightly lower bringing higher yields.  Oil was higher in the 71s (more below) & gold gained 7 to 1229.

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The federal gov closed the 2018 fiscal year $779B in the red as tax cuts hit revenues & the gov paid more to service a growing national debt, according to Treasury Dept.  The deficit for the fiscal year - or the 12 months thru Sep - was the largest since 2012.  The data also showed a $119B budget surplus in Sep, which was larger than expected & a record for the month.  A senior Treasury official said the monthly surplus was smaller when adjusted for calendar shifts.  Economists generally view the corp & individual tax cuts passed by the Trump administration late last year & an increase in gov spending agreed in early Feb as likely to balloon the nation's deficit.  The deficit in the 12 months thru Sep was $113B, 17% bigger than in the same period a year earlier.  Adjusting for calendar effects, the gap was even larger.  Much of the widening of the deficit came from more spending on interest payments on the national debt.  Borrowing has increased over the last year, partially to make up for slower growth in tax revenues due to the tax cuts.  Also fueling debt servicing costs, the Federal Reserve has been slowly raising interest rates since 2015 in a bid to keep inflation under control.  Pres Trump has criticized the Fed, saying on Oct 10 that the central bank had "gone crazy."  Another factor in the widening of the deficit was an increase in spending on the military.  With the calendar adjustments, the trade surplus in Sep was $59B compared with a $56B surplus the year earlier, the Treasury official said.  The gap for the fiscal year was $827B versus an adjusted $658B  in fiscal 2017.

US federal government posts widest deficit since 2012

Oil prices rose as tension over the disappearance of a prominent Saudi journalist stoked supply worries, balancing concerns over the long-term demand outlook.  Crude markets were also supported in the wake of data that showed South Korea did not import any oil from Iran in Sep for the first time in 6 years, before US sanctions against the Middle Eastern country take effect in Nov.  Brent crude futures were up 25¢ at $80.68 a barrel & US crdue futures ended the session up 44¢ to $71.78 a barrel.  Last week, both contracts fell by more than 4% as US stock markets tumbled.  Rising geopolitical tension between the US, the world's top oil consumer, & Saudi Arabia, one of the biggest oil producers supported prices today.  Riyadh has been under pressure since journalist Jamal Khashoggi, a critic of the kingdom & a US resident, disappeared on Oct 2 after visiting the Saudi consulate in Istanbul.  Pres Trump threatened "severe punishment" if it is found that Khashoggi was killed in the consulate.  Saudi Arabia said it would retaliate to any action against it over the Khashoggi case.  This comes at a critical time for global oil markets, which are bracing for US sanctions against Iran due to come into force Nov 4.  The US is still aiming to cut Iran's oil sales to zero, the US special envoy for Iran said today.  South Korea in Sept stopped importing Iranian oil for the first time in years.  Other producers are aiming to boost production amid falling Iranian exports, with Iraq planning to increase oil exports from its southern ports to 4M barrels per day (bpd) in the Q1-2019.

US crude rises 44 cents, settling at $71.78, amid Saudi tensions

The oil market is on edge after Saudi Arabia issued a combative statement that some are interpreting as a veiled threat to wield crude as a weapon in the ongoing scandal over missing dissident Jamal Khashoggi.  The question is whether Saudi Arabia, the world's largest oil exporter, a close ally of Pres Trump & the de facto leader of OPEC, would take that extraordinary step, one it has not taken since the Arab oil embargo of 1973-1974.  To be sure, the current leadership in Riyadh is facing unprecedented scrutiny over allegations that the kingdom ordered the abduction of Khashoggi, a Saudi journalist & Washington Post columnist.  Turkey says it believes that Saudi agents detained & killed Khashoggi at the kingdom's consulate in Istanbul.  Saudi Arabia denies those claims.  The scandal has caused businesses, influential individuals & media companies to drop out of this month's Future Investment Initiative, a conference in Riyadh meant to attract investment in the kingdom.  The US & European nations have threatened punishment if Saudi Arabia is found to be behind Khashoggi's alleged murder.  That has caused Saudi Arabia to react forcefully.  In a weekeknd interview, Trump said that the kingdom would face "severe punishment" if the allegations against it turn out to be true.  This came after US lawmakers raised the prospect of applying sanctions meant to punish human rights abuses against Saudis.  The following morning, the Saudi Press Agency issued a statement saying Riyadh rejects all threats of economic sanctions, political pressure & false accusations, adding that it will respond to any action with "greater action."  What caught the eye of many oil market watchers was a reminder in the statement that "the Kingdom's economy has an influential and vital role in the global economy."  Some took that as a veiled threat that Saudi Arabia could withhold supply & let oil prices rise.  A few hours later, the Saudi embassy in DC tweeted a clarification of the statement, saying it appreciated those who are not jumping to conclusions, including the US.  Saudi Arabia produces about 10.5M barrels of oil per day, equal to more than 10% of global crude demand.  It exports about 7M barrels a day of crude oil, depending on the month.  Given those figures, the kingdom is a central pillar of the global oil market at any time.  But its influence is especially pronounced right now.  That's because the Trump administration is aiming to wipe out oil exports from Iran, OPEC's third biggest partner & a long-time enemy of both Saudi Arabia & the US.  Trump restored sanctions on Iran in May & gave oil buyers until Nov 4 to stop importing Iranian crude.  Saudi Arabia is one of the few OPEC nations with enough spare capacity to offset the loss of Iranian barrels.  The Trump administration is relying on the kingdom to increase output & blunt the upward pressure on oil prices caused by its Iran policy.  Brent crude recently hit a nearly 4-year high above $86 a barrel, largely fueled by uncertainty over the impact of the Iran sanctions and concerns about Saudi Arabia's ability to fill the gap.

Why the market is suddenly concerned Saudi Arabia will weaponize oil in Khashoggi dispute

Crude-oil production from 7 major US shale plays is expected to see a climb of 98K barrels a day in Nov to 7.714M barrels a day, according to a report from the Energy Information Administration.  Oil output from the Permian Basin, which covers parts of western Texas & southeastern New Mexico, is expected to see the largest climb among the big shale plays, with an increase of 53K barrels a day in Nov from Oct.

U.S. shale oil output forecast to climb by 98,000 barrels a day in November: EIA

The oil market is the center of attention for traders.  Saudi relations are coming under increased scrutiny at the same time the market is preparing to deal with reduced exports from Iran.  However over the short term Q3 earnings will be a major driver for the stocks & expectations are running high with many optimistic forecasts for the important holiday season.  As shown below, the Dow has had a severe tumble so far in Oct.  Additionally, selling in the last hour today cost the Dow 200.

Dow Jones Industrials

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