Up and down.  And Everything in Between

Up and down.  And everything in between.  Equity markets posted gains early in yesterday’s session led by beleaguered tech shares only to give up gains later in the day.  With very little in the way of economic or earnings releases markets were, once again, subject to the overall negative sentiment brought on by trade fears and rising interest rates.  The S&P500 Index fell -0.15% closing off of its lows of the session. The index will continue to get support at 2700 and will encounter resistance from its 2747 Fibonacci line (see chart 4 in my attached daily chartbook).  The Dow Jones industrial Average fell -100 points, or -0.40% in yesterday’s trade also closing off its lows.  The index, which remains constructive, will trade in the narrow gap between its 200 day moving average and its 25464 Fibonacci line (see chart 6 in my attached daily chartbook).  Though the index traded above its key 1525 Fibonacci line, the Russel 2000 was unable to post a close above.  The index remains vulnerable in the lower end of its secular range (see chart 7 in my attached daily chartbook).  The NASDAQ 100 was the shining star yesterday, managing to close up +0.01 points (yeah that’s 1/100), which we are going to call break even.  The NASDAQ will get support from its 6747 Fib line and resistance above at its 6929 Fibonacci line.  The real news yesterday, and the past several days in fact, was crude oil. Crude fell once again in yesterday’s session making it 12 consecutive negative days of negative closes.  The commodity has had a rough time since hitting a high of 76.9 on October 3rd with the drop largely attributed to a growth in supply.  Although recently an expected decrease in demand is also weighing on prices.  With crude oil being so much in focus lately, I thought I might give you a bit of background on the important commodity.  It is, after all, geek-out Wednesday.

First of all there are two primary types of crude oil: North Sea Brent and West Texas Intermediate (WTI). Both are considered light sweet crude, which means that they can be effectively refined into gasoline.  I tend to focus on WTI as it is the primary driver of crude pricing in the US and though there are slight differences in North Sea and WTI, they trade in a similar fashion.  Crude oil is a hydrocarbon which is obtained via drilling and is typically found along with natural gas deposits (another commodity).  Once the crude oil is drilled it is refined through a distillation process which yields gasoline, diesel fuel, kerosine, heating oil, jet fuel, asphalt, and many other byproducts.  It should be clear why it is so important to not only industry but also consumers.  The Word’s largest producers of crude are Saudi Arabia, Russia and the United States while the largest consumers of the commodity are the United States, China, Japan, India, Russia, Saudi Arabia, Brazil, Germany, South Korea, and Canada (in order).  Though the US played a critical roll in the development of the technologies around crude production starting in the industrial revolution, the US became a net importer of oil in the later part of the 1900’s during which production shifted to the Middle East and South America giving rise to the Organization of Petroleum Exporting Countries (OPEC), which was founded in 1960.  As one might guess OPEC wielded quite a bit of power and acted like a cartel fixing prices by carefully controlling supply.  In the early part of the 21st century, US oil producers developed a technique called hydro-fracturing (affectionately known as fracking), which enabled producers to access a large untapped resource of oil. Fracking technology brought the US back into the fray of oil producers and it is now the largest producer in the world.  The US is now a net exporter of crude oil and OPEC has lost its chokehold on price fixing, subjecting crude to the typical market forces of supply and demand.  I covered supply and demand in a past geek-out Wednesday, but the general gist of it is as follows:  if supply is greater than demand, prices go down and if demand is greater than supply prices go up.  Let’s discuss demand first.

Consumers demand more heating oil in the Winter (obvious) causing a seasonal surge in demand.  Consumers drive and fly more when economies are expanding so fuel demand increases.  On an industrial level, companies need more crude byproducts when business is good, typically during economic expansions.  As we know from following economic releases, economies grow in fits and spurts and so does industrial demand for crude. Another factor impacting crude demand is clean energy.  In economics, substitute goods provide the consumer a good that can be consumed in the place of another.  The emergence of battery powered cars will eventually lessen the demand for gasoline (if Elon Musk has his way).  Now a quick word about supply.  I mentioned the word cartel above because OPEC is largely considered to be a cartel (from an economic perspective) in that member nations coordinate production in order to impact prices.  OPEC will decide to cut crude production in order to raise prices (reduce supply) and member nations will literally cut production.  The opposite holds true if they want to decrease prices in order to maintain healthy demand. I won’t get too far down this rabbit hole, but there are incentives for the cartel to lower prices because if the price of fuel gets too high, consumers will stop consuming and seek alternatives like Teslas, bikes, solar heat, or just plain walking.  Now it should make sense why it is referred to as “black gold”.  Many users or crude products utilize the futures market to hedge their business interests.  For example, if an airline believes that jet fuel prices will be going up in the future, they may purchase futures contracts enabling them to take delivery of fuel in the future at a pre-agreed upon price.  Traders also use futures to speculate through buying and selling to place bets on the ups and downs of the market.  I suggest that you use crude not as an investment but rather as an economic indicator.  You can follow it here daily on chart 11 of my attached daily chartbook or by using the symbol USO, which is an exchange traded partnership that reflects changes in the price WTI.

This morning, the Bureau of Labor statistics released its Consumer Price Index which showed an expected annual growth of +2.5% versus last month’s +2.3%.  Ex food and energy prices grew at a lower than expected rate of +2.1% versus last month’s +2.2%.  The decrease should be a positive sign for the markets today which will search for its footing.  Traders will also hope to glean some positive information from Fed governor speeches.  Today’s speakers include the Fed Chairman Jay Powell and the Vice Chairman Randal Quarles, who will be testifying on Capital Hill.  Oh and the EIA delivers its weekly petroleum update this afternoon which details current production levels (supply), which will surely be watched closely by industrialists, traders, and now you!  Please call me if you have any questions.

daily chartbook 2018-11-14