Author: Consultant

February WTI crude oil (CLG24) on Friday closed down -0.67 (-0.90%), and Feb RBOB gasoline (RBG24) closed down -2.07 (-0.95%).

Crude oil and gasoline prices on Friday settled moderately lower.  Expectations that global oil supplies will remain adequate despite geopolitical risks in the Middle East are weighing on crude prices.  A weaker dollar Friday limited losses in energy prices.

The outlook for adequate global crude supplies is weighing on prices after the International Energy Agency said global oil markets will likely remain “reasonably well-supplied” this year, provided there are no major disruptions, as production climbs outside OPEC+ producers.

Friday’s U.S. economic news was mixed for energy demand and crude prices.  On the negative side, Dec existing home sales unexpectedly fell -1.0% m/m to a 13-year low of 3.78 million versus expectations of a +0.3% m/m increase to 3.83 million.  Conversely, the University of Michigan U.S. Jan consumer sentiment index rose +9.1 to a 2-1/2 year high of  78.8, stronger than expectations of 70.1.

The recent series of hostile incidents in the Red Sea against commercial shipping is bullish for oil prices.  Last Friday, the U.S. Navy advised vessels to avoid the southern Red Sea.  Houthis started attacking ships in the Red Sea in mid-November in support of Hamas in the Israeli-Hamas war and said they won’t stop the attacks until Israel ends its assault on Gaza.  Attacks on commercial shipping in the Red Sea by Iran-backed Houthi rebels have forced shippers to divert shipments around the southern tip of Africa instead of going through the Red Sea, disrupting global crude oil supplies.

An increase in Russian crude oil exports is bearish for crude oil prices.  Tanker-tracking data from Vortexa monitored by Bloomberg shows the four-week average of refined fuel shipments from Russia rose to 2.77 million bpd in the four weeks to Jan 14, up +53,000 bpd from the prior week.

In a bullish factor, Libya’s National Oil Corporation declared force majeure on Jan 7 at its Sharara oil field, which was shut down on Jan 3 after protestors entered the facility.  The Sharara oil field is Libya’s largest and pumps about 300,000 bpd.

A decline in crude in floating storage is bullish for prices.  Monday’s weekly data from Vortexa showed that the amount of crude oil held worldwide on tankers that have been stationary for at least a week fell -14% w/w to 75.76 million bbl as of Jan 12.

On Nov 30, OPEC+ agreed to cut crude production by -1.0 million bpd through June 2024.  However, crude prices sold off on the news since no details were provided on how the cuts would be distributed among members, nor how Russia’s -300,000 bpd export cut would factor into the new totals.  Delegates said the final details of the new accord, including national production levels, would be announced individually by each country rather than in the customary OPEC+ communique.  The market was disappointed that the extra cuts in OPEC crude output will be announced by each individual country, which suggests the reductions are only voluntary.  Meanwhile, Angola on Dec 21 announced that it was leaving OPEC amid a dispute over oil production quotas.

Saudi Arabia said on Nov 30 that it would maintain its unilateral crude production cut of 1.0 million bpd through Q1-2024.  The move would maintain Saudi Arabia’s crude output at about 9 million bpd, the lowest level in three years.  Russia also said it will deepen its voluntary oil export cuts by 200,000 bpd to 500,000 bpd in Q1 of 2024.  OPEC Dec crude production fell -40,000 bpd to 28.050 million bpd.

Thursday’s EIA report showed that (1) U.S. crude oil inventories as of Jan 12 were -2.7% below the seasonal 5-year average, (2) gasoline inventories were +0.3 above the seasonal 5-year average, and (3) distillate inventories were -3.4% below the 5-year seasonal average.  U.S. crude oil production in the week ended Jan 12 rose +0.8% w/w at 13.3 million bpd, matching the record high.

Baker Hughes reported Friday that active U.S. oil rigs in the week ended Jan 19 fell by -2 rigs to 497 rigs, just above the 2-year low of 494 rigs from Nov 10.  The number of U.S. oil rigs in the past year has fallen from the 3-3/4 year high of 627 rigs posted in December 2022.

Tourmaline Oil Corp. TOU-T has been hit hard since the start of November, as natural gas prices tumbled at the prospect of an unusually warm winter. But if gas prices are now bottoming out at a time when energy stability is taking on a new-found importance, the stock could be a sound bet.

The past three months have been rough for investors in the Calgary-based oil and gas producer.

The share price has retreated 23 per cent over this period, following the path of the company’s most important energy commodity: natural gas futures on the New York Mercantile Exchange have fallen 38 per cent over the past 10 weeks, and are now down more than 70 per cent from spikey highs in 2022.

Though Tourmaline also produces crude oil, gas accounts for the largest share of the company’s production revenue. Gas sales fell 44 per cent in the first nine months of 2023; full year results will be reported on March 6.

Some of this volatility was inevitable. The Russian invasion of Ukraine upset global energy markets in 2022, causing natural gas prices – and crude oil – to soar before revamped trade networks restored stability.

More recently, gas prices succumbed to an unusually mild start to the winter, which reduced demand for heating. According to the U.S. Energy Information Administration, gas storage levels are more than 11 per cent above the five-year average and more than 12 per cent higher than a year ago, as of Jan. 12, despite the current cold snap.

Attribute this surplus energy to persistent climate change or the temporary effects of El Niño. But either way, gas is plentiful and cheap right now, which is weighing on investor sentiment toward Tourmaline and naturally raising questions about the sustainability of the company’s generous dividend policy, a key attraction for some shareholders.

The contrarian take? Though some analysts expect that natural gas prices will remain weak through the first half of this year, they believe that prices should pick up after that, bolstering the argument for investing in Tourmaline when the stock is out-of-favour.

“At the risk of sounding like a broken record, we expect natural gas markets are likely to remain oversupplied in 2024 but improve in 2025,” Dennis Fong, an analyst at CIBC Capital Markets, said in a report this week.

A warmer-than-usual summer, typical of the seasons that follow El Niño winters, could increase demand for energy at the start of the second half of the year, as homeowners and businesses crank up their air conditioning.

But the more compelling case for natural gas rests on a couple of longer-term factors.

For starters, natural gas is gaining support as a reliable energy source amid rising electricity demand, the retirement of coal-fired plants and cost-overruns associated with the development of renewable energy.

Natural gas-fired power plants, though hardly clean, offer an effective way to transition from dirtier coal, and are immune to the sort of intermittencies that might affect, say, wind turbines.

According to Mr. Fong, the amount of natural gas used to generate electricity in the United States has risen by about 25 per cent since 2020, driven by the retirement of coal plants and the underperformance of renewable energy.

Rising exports to energy-dependent Asia and Europe can also build a more diversified market for natural gas, potentially supporting prices in places where demand is high.

In 2023, Tourmaline began sending liquefied natural gas to an export terminal on the U.S. Gulf Coast. This week, it announced additional LNG agreements as part of its goal to double over the next few years the amount of gas – as a share of overall production – that is exported.

“These deals are incrementally positive steps toward diversifying Canada-produced gas to broader global markets,” Aaron Bilkoski, an analyst at TD Securities, said in a note.

In the meantime, even with U.S. natural gas prices drifting along three-year lows, Tourmaline remains confident it can generate sufficient cash – thanks in part to hedging and higher global prices – to support its quarterly dividend and distribute four special dividends in 2024.

Last year, these combined dividends added up to $6.55 a share. That translates to a trailing dividend yield of 11.5 per cent, based on the current share price, rewarding investors who didn’t become agitated when energy prices turned weaker.

Granted, special dividends might not be so special this year. But if natural gas consumption recovers in the second half of 2024, and if commodity prices start to improve next year, then Tourmaline could reward investors with something even better than dividends: a rebounding share price.

Published: 1/18/2024 2:06 PM ET | 

Gold futures settled higher on Thursday as the dollar stayed a bit subdued and Treasury yields dipped after climbing up on Wednesday on rate outlook jitters.

The dollar recovered after trading weak during Asian and European sessions. After rising to 103.63, the dollar index eased a bit to 103.56, up nearly 0.1% from the previous close.

Gold futures for February ended higher by $15.10 at $2,021.60 an ounce, rebounding after posting losses in the previous two sessions.

Silver futures for March ended up $0.138 at $22.807 an ounce, while Copper futures for March settled at $3.7450 per pound, gaining $0.0120.

“Traders have slightly pared back expectations for rate cuts this year compared with the end of 2023 which has weighed on the yellow metal and could continue to do so if the data doesn’t perform,” says Craig Erland, Senior Market Analyst at OANDA, UK & EMEA. He adds that a move below $2,000 could be a significant psychological blow but as things stand, the trend and momentum aren’t looking particularly favorable.

A report from the Labor Department said initial jobless claims fell to 187,000 in the week ended January 13th, a decrease of 16,000 from the previous week’s revised level of 203,000. Economists had expected jobless claims to inch up to 207,000 from the 202,000 originally reported for the previous week.

With the unexpected decline, jobless claims dropped to their lowest level since hitting 182,000 in the week ended September 24, 2022.

A report released by the Federal Reserve Bank of Philadelphia showed regional manufacturing activity contracted at a slightly slower rate in the month of January.

The Philly Fed said its diffusion index for current general activity rose to a negative 10.6 in January from a revised reading of negative 12.8 in December. Economists had expected the index to rise to a negative 7.0 from the negative 10.5 originally reported for the previous month.

Data from the Commerce Department showed housing starts slumped by 4.3% to an annual rate of 1.460 million in December.

Published: 1/18/2024 3:11 PM ET | 

Oil prices climbed higher on Thursday, lifted by data showing a drop in U.S. crude inventories in the week ended January 12th, and on higher forecasts for global oil demand.

Recent strong U.S. economic data also point to a likely jump in oil demand. Meanwhile, tensions in the Middle East continue to disrupt global shipping and trade.

Data from U.S. Energy Information Administration (EIA) showed crude inventories dropped by 2.5 million barrels last week, as against expectations for a declined of 313,000 barrels.

Gasoline inventories increased by 3.1 million barrels last week, higher than an expected increase of 2.2 million barrels, while distillate stocks were up 2.4 million barrels in the week, more than 2.5 times the expected increase.

West Texas Intermediate Crude oil futures for February ended higher by $1.52 at $74.08 a barrel.

Brent crude futures were up $1.20 or 1.53% at $79.08 a barrel a little while ago.

The International Energy Agency (IEA) and the Organization of the Petroleum Exporting Countries (OPEC), both said in their reports that global oil demand will see a significant growth this year.

The IEA said in its montly report that oil demand will likely grow by 1.24 million barrels per day in 2024, up 180,000 barrels per day from its earlier projection.

The OPEC said in its report on Wednesday that it expects demand to rise by 2.25 million barrels per day this year, and by 1.85 million barrels per day to 106.21 millon barrels per day in 2025.

The number of Americans filing new claims for unemployment benefits fell last week to the lowest level in nearly 1-1/2 years, suggesting job growth likely remained solid in January.

The unexpected decline in initial claims reported by the Labor Department on Thursday added to strong retail sales growth in December in painting an upbeat picture of the economy, and could make it difficult for the Federal Reserve to start cutting interest rates in March as financial markets anticipate.

“The labor market remains strong and reinforces our view that the Fed is likely to hold rates at current levels until the middle of 2024,” said Eugenio Aleman, chief economist at Raymond James.

Initial claims for state unemployment benefits dropped 16,000 to a seasonally adjusted 187,000 for the week ended Jan. 13, the lowest level since September 2022. Economists polled by Reuters had forecast 207,000 claims for the latest week.

Claims data tend to be volatile at the turn of the year. Some of the volatility relates to fewer layoffs after the holidays than is normal.

While that could have contributed to some of the drop in claims, economists said the data was consistent with a fairly tight labor market. They noted that companies generally remained reluctant to lay off workers following difficulties finding labor during and after the COVID-19 pandemic.

Unadjusted claims decreased 29,543 to 289,228 last week, with filings plunging by 17,176 in New York.

There were also significant declines in Michigan, Pennsylvania, Wisconsin, South Carolina, Georgia and Minnesota, which more than offset notable increases in California, Iowa, Kansas and Texas.

“Seasonal layoffs after the holiday season have been milder than usual, leading to a decline in the published seasonally adjusted level of claims,” said Lou Crandall, chief economist at Wrightson ICAP. “This is not an example of a seasonal ‘distortion’ because the labor market tightness that is making employers wary of laying workers off temporarily is real.”

Stocks on Wall Street were mixed while the dollar rose against a basket of currencies. U.S. Treasury prices fell.

Financial markets have lowered their bets for a rate cut at the U.S. central bank’s March 19-20 policy meeting to below 60 per cent, according to CME Group’s FedWatch Tool.

Fed Governor Christopher Waller said this week that the economy was “doing well” and giving the U.S. central bank “the flexibility to move carefully and methodically.”

The Fed has hiked its policy rate by 525 basis points to the current 5.25 per cent-5.50 per cent range since March 2022.

The claims data covered the period during which the government surveyed employers for the nonfarm payrolls component of January’s employment report.

Claims fell between the December and January survey period, suggesting that strong job growth persisted this month. The economy added 216,000 jobs in December.

Data next week on the number of people receiving benefits after an initial week of aid, a proxy for hiring, will offer more clues on the state of the labor market in January.

The so-called continuing claims decreased 26,000 to 1.806 million during the week ending Jan. 6, the lowest since October, the claims report showed.

Homebuilding paused in December after strong gains in the prior three months.

Single-family housing starts, which account for the bulk of homebuilding, fell 8.6 per cent to a seasonally adjusted annual rate of 1.027 million units last month, the Commerce Department’s Census Bureau said in a separate report. Wet weather last month likely contributed to the plunge in homebuilding.

Single-family starts increased 15.8 per cent on a year-on-year basis as a shortage of previously owned houses for sale fuels demand for new construction. Permits for future construction of single-family homes increased 1.7 per cent to a pace of 994,000 units last month, the highest level since May 2022.

That aligns with a recent sharp improvement in homebuilder sentiment and reflects declining mortgage rates.

The perennial inventory shortage has combined with still high mortgage rates to weigh on sales of previously owned homes. But new construction demand is boosting residential investment, which rebounded in the third quarter after nine straight quarterly decreases, supporting the economy.

Starts for housing projects with five units or more increased 7.5 per cent to a rate of 417,000 units in December.

Overall housing starts fell 4.3 per cent to a rate of 1.460 million units in December. Starts declined 9.0 per cent to 1.413 million units in 2023. Multi-family building permits rose 1.4 per cent to a rate of 449,000 units last month. Building permits as a whole increased 1.9 per cent to a rate of 1.495 million units. They dropped 11.7 per cent to 1.470 million units in 2023.

The single-family homebuilding backlog rose 0.7 per cent to 140,000 units last month, while the rate for completions jumped 8.4 per cent to 1.056 million units, the highest level since November 2022. The inventory of single-family housing under construction decreased 1.2 per cent to a rate of 671,000 units.

Housing completions increased 4.5 per cent to 1.453 million units in 2023. According to the National Association of Realtors, the inventory of previously owned homes on the market is just above 1 million units, well below nearly 2 million units before the COVID-19 pandemic. Realtors estimate housing starts and completion rates need to be in a range of 1.5 million to 1.6 million units per month to bridge the inventory gap.

“More supply is still needed,” said Orphe Divounguy, a senior economist at Zillow. “Due to more than a decade of underbuilding, a significant shortage of housing options is fueling America’s housing affordability crisis.”

• Restaurant Brands International will spend about $1 billion to buy the largest U.S. franchisee of Burger King.
• The acquisition comes more than a year after Restaurant Brands unveiled its turnaround strategy for Burger King U.S.
• Restaurant Brands plans to remodel 600 of Carrols’ Burger King locations rapidly over the next five years and then sell them back to franchisees.

https://www.cnbc.com/2024/01/16/burger-king-owner-restaurant-brands-buys-carrols-largest-us-franchisee.html

• “It’s a very serious situation and seems to be getting worse,” Chevron CEO Michael Wirth said of the crisis in the Red Sea.
• Wirth said he was surprised that U.S. crude oil was trading below $73 a barrel because the “risks are very real.”
• Chevron has continued transporting crude through the region as the company works closely with the U.S. Navy’s Fifth Fleet, Wirth said.

https://www.cnbc.com/2024/01/16/red-sea-crisis-poses-very-real-risk-to-oil-chevron-ceo-says.html

U.S. stocks ended lower on Tuesday after mixed earnings from Morgan Stanley and Goldman Sachs pressured banks, and as sell-offs in Boeing and Apple weighed on the S&P 500. The TSX also gave back some recent gains, as a drop in commodity prices pressured resource shares and domestic inflation data tempered hopes for an early interest rate cut by the Bank of Canada.

Morgan Stanley tumbled 4.2% to a more than one-month low after it posted a lower quarterly profit, while Goldman Sachs’ stock ended 0.7% higher after it reported a 51% rise in profit.

The S&P 500 banks index dipped 1.2% to an over one-month low after other major U.S. banks reported lower profits on Friday.

Spirit Airlines slumped 47% after a federal judge blocked JetBlue Airways’ planned US$3.8 billion acquisition of the ultra-low cost carrier, agreeing with the U.S. Department of Justice the deal would hurt consumers.

Apple dropped 1.2% after offering rare discounts on its iPhones in China in response to stiff competition there, days after being overtaken by Microsoft as the world’s most valuable firm.

Boeing slumped almost 8% to a two-month low after the Federal Aviation Administration extended the grounding of its 737 MAX 9 airplanes indefinitely and Wells Fargo downgraded the stock to “equal weight” from “overweight.”

Federal Reserve Governor Christopher Waller dampened sentiment by saying there should be no rush to cut interest rates even though he was more confident of inflation being on track to meet the Fed’s 2% target.

Traders pared expectations that the Fed might begin its rate cuts in March, with U.S. Treasury yields also rising. Fed funds futures traders were pricing for over 150 basis points in rate cuts this year, but assigned about a 60% chance of a rate cut in March after Waller’s speech, down from about 70% earlier. Two-year U.S. yields, which generally tend to more closely reflect monetary policy expectations, were at about 4.228%, up from 4.138% on Friday.

“Certainly valuations are extended, but I think what is happening today is more of a broader consolidation of markets around that idea that investors had gotten a little too optimistic about how willing the Fed would be to ease rates,” said Ross Mayfield, an investment strategy analyst at Baird.

The Toronto Stock Exchange’s S&P/TSX composite index ended down 113.79 points, or 0.5%, to 20,948.09. Last week, it notched a 20-month high at 21,074.91.

Canada’s annual inflation rate rose to 3.4% in December. That was expected but an acceleration in underlying price pressures spooked some investors.

Money markets see a one-in-three chance that the Bank of Canada will shift to rate cuts in March, down from nearly 50% before the data, but stuck with bets for the first cut in April.

The TSX energy sector fell 3.1% as the price of oil settled 0.4% lower at US$72.40 a barrel.

The price of gold also declined, falling 1.3%, while the materials group, which includes precious and base metals miners and fertilizer companies, lost 2.3%.

The move lower for commodity prices came as the U.S. dollar jumped to its highest level in a month against a basket of major currencies.

Barrick Gold slumped 8.8% after the company reported preliminary gold output of 4.05 million ounces in the financial year 2023, below its forecast and analysts’ estimates of 4.16 million ounces.

The TSX consumer staples sector provided some ballast, gaining 0.5%.

Following strong December gains, the S&P 500 has been near its January 2022 record high close for the past several sessions. It is now down about 1% from that record high.

Wall Street rose last week as investors continued to bet on an early start to the Fed’s monetary-policy-easing cycle, despite a lack of supporting voices among policymakers and mixed inflation data.

UBS Global Research boosted its 2024 year-end target for the S&P 500 to 5,150 points, representing a more than 8% upside from current levels.

Of the 11 S&P 500 sector indexes, 10 declined, led by a 2.4% drop in energy, followed by a 1.2% loss in materials. The technology index rose 0.4%.

The S&P 500 declined 0.37% to end the session at 4,765.98 points.

The Nasdaq declined 0.19% to 14,944.35 points, while Dow Jones Industrial Average declined 0.62% to 37,361.12 points.

Advanced Micro Devices jumped 8.3% after Barclays analysts raised their price targets for AMD and several other chipmakers, saying they would benefit from growth in artificial intelligence. Larger rival Nvidia climbed about 3% and hit a record high.

Declining stocks outnumbered rising ones within the S&P 500 by a 2.6-to-one ratio. The S&P 500 posted 23 new highs and two new lows; the Nasdaq recorded 63 new highs and 182 new lows.

Volume on U.S. exchanges was relatively heavy, with 13.0 billion shares traded, compared to an average of 12.1 billion shares over the previous 20 sessions.

Reuters, Globe staff

Canada’s annual inflation rate rose to 3.4 per cent in December, up from 3.1 per cent in November, Statistics Canada said Tuesday – matching financial analysts’ expectations.

The Bank of Canada is broadly expected to continue to hold its key interest rate at five per cent at its next decision on Jan. 24. However, the timing of the first interest rate cut is expected to be driven by how fast inflation falls and how sharply the economy softens this year.

The January 2024 inflation report will be released on February 20.

Markets react to the latest inflation data

Markets were taken a little off guard with the higher-than-expected core readings of inflation, with the Canadian dollar immediately rising to 74.30 cents US, up about a tenth of a cent and the two-year government of Canada bond yield bumping up an additional couple basis points. At 8:42 a.m. ET, Canada’s two-year bond yield was fetching 3.873 per cent, up about 9 basis points for the session and widening its spread against the equivalent U.S. note. Implied interest-rate probabilities in swaps markets saw modest moves as well, but nothing that meaningfully changes what traders see ahead for moves this year in the Bank of Canada overnight rate. Markets are pricing in about a 30 per cent chance of a cut in the BoC overnight rate at its March meeting, rising to 73 per cent odds by April. Prior to today’s inflation release, those probabilities stood at 40 per cent and 87 per cent, respectively.

Regardless, money markets remain convinced we’ll see the bank start cutting rates in the first half of this year, with 99 per cent odds of at least a quarter point cut by June. Nearly 125 basis points of cuts are currently priced into markets by the end of this year.