Oil jumps to 5-week high lifted by OPEC+ output cut

Oil rose about 3% to a five-week high on Friday, carried higher again by an OPEC+ decision this week to make its largest supply cut since 2020 despite concern about a possible recession and rising interest rates.

The cut from the Organization of Petroleum Exporting Countries and allies including Russia, known as OPEC+, comes ahead of a European Union embargo on Russian oil and will squeeze supply in an already tight market.

Brent crude was up $3.48, or 3.7%, to $97.90 a barrel. U.S. West Texas Intermediate, or WTI, crude gained $4.18, or 4.7%, to $92.63.

Oil kept rallying even as the dollar moved higher after data showing the U.S. economy was creating jobs at a strong pace gave the Federal Reserve a reason to continue hefty interest rate hikes. A strong dollar can pressure oil demand, making crude more expensive for other currency holders.

Both benchmarks were on track for their highest closes since Aug. 30, their fifth straight daily rise and second straight weekly gain, in technically overbought territory.

For the week, Brent was up about 10% and WTI up about 15%. Both would be the biggest weekly percentage gains since March.

U.S. heating oil futures jumped 18% this week, putting the heating oil crack spread – a measure of refining profit margins – on track for its highest close on record, according to Refinitiv data going back to December 2009.

The Organization of the Petroleum Exporting Countries and allies including Russia, known as OPEC+, agreed this week to lower their output target by 2 million barrels per day.

“Among the key ramifications of OPEC’s latest cut is a likely return of $100 oil,” said Stephen Brennock of oil broker PVM.

UBS Global Wealth Management also projected Brent would “move above the $100 bbl mark over the coming quarters.”

The OPEC+ cut from the comes ahead of a European Union embargo on Russian oil and will squeeze supply in an already tight market.

OPEC Secretary General Haitham al-Ghais said the output target cuts will leave OPEC+ with more supply to tap in the event of any crises.

On Thursday, U.S. President Joe Biden expressed disappointment over the OPEC+ plans. He and U.S. officials said Washington was looking at all possible alternatives to keep prices from rising.

“With Brent now firmly back in the $90-100 range, the group will likely be pleased with the outcome although substantial uncertainty remains over the economic outlook,” said Craig Erlam of brokerage OANDA, referring to OPEC+.

In Europe, divisions between European Union leaders over capping gas prices and national rescue packages resurfaced, with Poland accusing Germany of “selfishness” in its response to a winter energy crunch caused by Russia’s war in Ukraine.

Petrol stations in the Paris region and throughout France were having problems getting enough fuel supplies as strikes at four TotalEnergies SE refineries continue for a tenth day.

US job growth slows again in September with just 263,000 positions added

U.S. job growth slowed for a second consecutive month in September, but hiring remained solid despite growing headwinds from higher interest rates, scorching-hot inflation and mounting recession fears.

Employers added 263,000 jobs in September, the Labor Department said in its monthly payroll report released Friday, slightly topping the 250,000 jobs forecast by Refinitiv economists. It maatch

The unemployment rate, meanwhile, unexpectedly dropped to 3.5%, the lowest since the COVID-19 pandemic began two years ago.

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This is a developing story. Please check back for updates.

Samsung profit plunges in first drop since 2019 as chipmakers feel bite

• Samsung forecast on Friday its operating profit likely plunged 32% in the third quarter of the year as weaker memory pricing and demand hit the technology giant.
• The forecast profit fall adds further concerns about the chip sector which is facing softer demand amid a weaker global macroeconomic environment.
• However, one analyst said that memory cycle is “bottoming” and prices could rise again next year which will help Samsung.

Samsung said Friday its operating profit likely plunged 32% in the third quarter of the year as weaker memory pricing and demand hit the technology giant.

The South Korean firm said it expects operating profit to be between 10.7 trillion ($7.57 billion) and 10.9 trillion South Korean won. It is the first decline in operating profit since 2019.

Samsung reported a revenue rise of between 75 trillion and 77 trillion Korean won, a 1.3% to 4% year-on-year rise.

Samsung’s chip business, which includes selling chips for laptops, servers and storage, as well as manufacturing semiconductors, accounts for 70% of its profits.

Samsung profit plunges in Q3 as chipmakers feel bite (cnbc.com)

Paying with a credit card will soon cost more as some businesses add transaction fees

An estimated one in five small businesses is planning to pass on credit-card transaction fees to their customers after new surcharge rules come into effect this week, according to a new survey from the Canadian Federation of Independent Business.

Starting Thursday, businesses will be allowed by credit-card companies to add surcharges to their bills for customers who are paying by credit card. The fees are not set, but would be around 1.4 per cent or more of the bill. Financial institutions use transaction fees in large part to fund loyalty programs.

The new rules are the result of a settlement in a long-running class-action legal battle between small merchants, Visa, MasterCard and financial institutions. Credit-card companies had long resisted allowing businesses to pass on these costs as it could lead consumers to switch payment methods to avoid paying the fees. Instead the cost is borne by merchants, many of whom feel they have to pay the fees to accommodate the many customers who want to pay by credit card.

CFIB president Dan Kelly said he is glad business owners now have the choice of making these fees transparent to their customers.

“Merchants have always had to pass on these fees to remain profitable; they’ve just buried them in the costs of goods,” he said.

According to the CFIB’s online survey of 3,914 members, conducted from Sept. 1 to 8, 19 per cent of respondents were planning to add the surcharges as soon as they could. Another 26 per cent said they would do so if their competitors did, 40 per cent said they were not sure yet and 15 per cent said they would not.

Those in consumer-facing businesses were the least likely to say they would pass on the costs. Only 12 per cent of retail, 17 per cent of personal services and 19 per cent of hospitality businesses said they were sure to add the surcharge.

On the other side, businesses that often sold to other businesses were more likely to want to pass on the transaction costs. Those sectors include: transportation (37 per cent); finance, insurance and real estate (32 per cent); and construction (31 per cent).

For those who did not want to pass on the fees, 79 per cent said it was because they thought it would alienate their customers.

Karl Littler, senior vice-president of public affairs at the Retail Council of Canada, said his group recently held an information session for members large and small, and while there was interest about the issue, he said he believes retailers will remain reluctant to begin surcharging.

“I think it will land with a dull thud in the retail space,” he said.

Still, credit-card fees have led to disputes between card companies and retailers. In 2016, Wal-Mart Canada stopped accepting Visa cards at stores in Thunder Bay and Manitoba for several months. The two sides reached an agreement on fees in early 2017 and Wal-Mart resumed accepting Visa.

The federal government promised in its 2021 budget to put pressure on the card companies and financial institutions to lower the fee from its present average of 1.4 per cent, but has yet to take action on that pledge.

Credit-card transaction fees have become a growing concern for businesses because customers are increasingly using cards instead of cash. According to Payments Canada, there were six billion transactions made with personal credit cards in 2021, compared with 4.5 billion in 2016. The total value of those transactions rose to $509-billion from $408-billion.

Although this legal settlement was driven by small enterprises, larger enterprises have also complained about credit-card transaction fees.

Telus Corp. wrote to its industry regulator, the Canadian Radio-television and Telecommunications Commission, in August asking permission to charge customers a 1.5-per-cent transaction fee if they pay their bill with a credit card. Telus told The Canadian Press it expected the charge to amount to an average of $2 a month.

Mr. Kelly said that large companies like Telus getting involved showed how much power credit-card companies have over all businesses. “It shows just how big the market imbalance is,” he said.

The close: OCT 6 – Major indexes lower as central banks pound rate hike drum; pot stocks surge on Biden

Major North American indexes closed lower on Thursday as concerns mounted ahead of closely watched monthly jobs reports Friday that the Federal Reserve’s aggressive interest rate stance will lead to a recession.

The slide in the TSX was steeper than in U.S. indexes, with heavily weighted financials losing nearly 3%. But pot stocks had one of their biggest rallies in years after U.S. President Joe Biden said he intends to offer criminal pardons to anyone convicted of simple possession of marijuana under federal law, and also signalled he wants to revisit how cannabis is classified as a controlled substance.

The S&P/TSX composite index ended down 256.08 points, or 1.3%, at 18,979.01. That was the second straight day of declines for the index after it rallied 5% over the course of Monday and Tuesday.

Financials fell 2.6%, while the consumer staples sector was down 2.9%.

Energy rose 1.9% as oil settled 0.8% higher at $88.45, adding to its gains on Wednesday when OPEC+ agreed to cut production targets by 2 million barrels per day, the largest reduction since 2020.

The TSX materials group, which includes precious and base metals miners and fertilizer companies, added 1.5% and healthcare ended 8.7% higher.

It included the sharp gains for cannabis producers, with Tilray Brands Inc up 32.6% and Canopy Growth 23.4%.

The Bank of Canada has also been raising rates at a rapid pace. Its governor, Tiff Macklem, made clear in a speech Thursday that the central bank will not yet be pivoting away from its hawkish stance. Macklem said the currency’s recent weakness will offset some easing of inflation pressures that could come from improving global supply chains and lower commodity prices.

Money markets raised bets on a 50-basis-point hike at the BoC’s next policy announcement on Oct. 26, pricing in a 70% chance of such a move versus roughly 50% before the governor’s speech.

Canadian government bond yields rose across a more deeply inverted curve, with the 2-year moving above the 4% threshold for the first time since October 2007. It was up 14.7 basis points at 4.013% by late afternoon.

Equity markets on both sides of the border briefly took comfort from data that showed U.S. weekly jobless claims rose by the most in four months last week, raising a glimmer of hope the Fed could ease the implementation since March of the fastest and highest jump in rates in decades.

Equities have been slow to acknowledge a consistent message from Fed officials that rates will go higher for longer until the pace of inflation is clearly slowing.

Chicago Fed President Charles Evans was the latest to spell out the central bank’s outlook on Thursday, saying policymakers expect to deliver 125 basis points of rate hikes before year’s end as inflation readings have been disappointing.

“The market has been slowly getting the Fed’s message,” said Jason Pride, chief investment officer for private wealth at Glenmede in Philadelphia.

“There’s a likelihood that the Fed with further rate hikes pushes the economy into a recession in order to bring inflation down,” Pride said. “We don’t think the markets have fully picked up on this.”

Pride sees a mild recession, but in the average recession there has been a 15% decline in earnings, suggesting the market could fall further. The S&P 500 has declined 22% from its peak on Jan. 3.

Despite the day’s decline, the three major U.S. indexes were poised to post a weekly gain after the sharp rally on Monday and Tuesday.

The labor market remains tight even as demand begins to cool amid higher rates. On Friday the nonfarm payrolls report on employment in September will help investors gauge whether the Fed alters its aggressive rate-hiking plans.

Money markets are pricing in an almost 86% chance of a fourth straight 75 basis-point rate hike when Fed policymakers meet on Nov. 1-2.

To be clear, not everyone foresees a hard landing.

Dave Sekera, chief U.S. market strategist at Morningstar Inc , said growth will remain sluggish for the foreseeable future and likely will not start to reaccelerate until the second half of 2023, but he does not see a sharp downturn.

“We’re not forecasting a recession,” Sekera said. “The markets are looking for clarity as to when they think economic activity will reaccelerate and make that sustained rebound.

“They’re also looking for strong evidence that inflation will begin to really trend down, moving back towards the Fed’s 2% target,” he said.

Ten of the 11 major S&P 500 sectors fell, led by a 3.3% decline in real estate. Other indices also fell, including semiconductors, small caps and Dow transports. Growth shares fell 0.76%, while value dropped 1.18%.

Energy was the sole gainer, rising 1.8%.

The Dow Jones Industrial Average fell 346.93 points, or 1.15%, to 29,926.94, the S&P 500 lost 38.76 points, or 1.02%, to 3,744.52 and the Nasdaq Composite dropped 75.33 points, or 0.68%, to 11,073.31.

Tesla Inc fell 1.1% as Apollo Global Management Inc and Sixth Street Partners, which had been looking to provide financing for Elon Musk’s $44 billion Twitter deal, are no longer in talks with the billionaire.

Alphabet Inc closed basically flat after the launch of Google’s new phones and its first smart watch.

Volume on U.S. exchanges was 10.57 billion shares, compared with the 11.67 billion average for the full session over the past 20 trading days. Declining issues outnumbered advancing ones on the NYSE by a 2.32-to-1 ratio; on Nasdaq, a 1.42-to-1 ratio favored decliners. The S&P 500 posted three new 52-week highs and 31 new lows; the Nasdaq Composite recorded 46 new highs and 118 new lows.

Stocks Fall As Bond Yields Rise On Hawkish Fed Comments

The S&P 500 Index ($SPX) (SPY) this morning is down -0.76%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.80%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.70%. 

Stocks this morning are moderately lower.  Stocks are under pressure today on concern the decision by OPEC+ Wednesday to cut its crude output by -2.0 million bpd will boost crude oil prices and keep inflation elevated for longer, which will keep aggressive Fed rate hikes in play. Nov WTI crude climbed to a 3-week high today.  Stock indexes briefly erased their losses this morning when T-note note yields temporarily fell after weekly U.S. jobless claims rose more than expected to a 5-week high. 

Stocks extended their losses this morning after hawkish comments today from Minneapolis Fed President Kashkari pushed T-note yields higher when he said the Fed is “quite a ways away” from a pause in interest rate hikes.  The 10-year T-note yield is up +7.9 bp to 3.830%. 

U.S weekly initial unemployment claims rose +29,000 to a 5-week high of 219,000, showing a weaker labor market than expectations of 204,000.

Minneapolis Fed President Kashkari said he is not seeing evidence that underlying inflation has peaked and that the Fed is “quite a ways away” from a pause in interest rate hikes.

Today’s stock movers…

Splunk (SPLK) is down more than -5% today to lead losers in the Nasdaq 100 after UBS downgraded the stock to neutral from buy. 

Digital Realty Trust (DLR) is down more than -4% today to lead losers in the S&P 500 after RBC Capital Markets cut its price target on the stock to $122 from $151. 

Okta (OKTA) is down more than -3% today after Evercore ISI initiated coverage of the stock with a recommendation of underperform. 

Tesla (TSLA) is down more than -1% today after Mizuho Securities cut its price target on the stock to $370 from $391.

A rally in WTI crude oil today to a 3-week high is boosting energy stocks and energy service providers.  Diamondback Energy (FANG) and Hess (HES) are up more than +2%. Also, Chevron (CVX) is up more than +1% to lead gainers in the Dow Jones Industrials.  In addition, Occidental Petroleum (OXY), Exxon Mobil (XOM), ConocoPhillips (COP), and Marathon Oil (MRO) are all up more than -1%. 

Take-Two Interactive Avantor (TTWO) is up more than +2% today to lead gainers in the S&P 500 after Goldman Sachs upgraded the stock to buy from neutral with a price target of $165.

Costco Wholesale (COST) is up more than +1% today to lead gainers in the Nasdaq 100 after reporting September total same-store comparable sales were up +8.5%, stronger than the consensus of +6.3%. 

Pinterest (PINS) climbed more than +3% today after Goldman Sachs upgraded the stock to buy from neutral.

Across the markets…

Dec 10-year T-notes (ZNZ22) today are down -17 ticks, and the 10-year T-note yield is up +7.9 bp at 3.8309%.  Higher European government bond yields today are weighing on T-note prices, as the 10-year UK gilt yield climbed to a 1-week high of 4.217%.  T-note losses accelerated this morning on hawkish comments from Minneapolis Fed President Kashkari, who said the Fed is “quite a ways away” from a pause in interest rate hikes. 

The dollar index (DXY00) this morning is up by +0.40%.   The dollar this morning is moderately higher on higher T-note yields.  Also, the weakness in stocks today has boosted the liquidity demand for the dollar.  In addition, hawkish comments today from Minneapolis Fed President Kashkari boosted the dollar when he said the Fed is “quite a ways away” from a pause in interest rate hikes.

EUR/USD (^EURUSD) today is down -0.41%.  Today’s Eurozone economic news weighed on the euro after Eurozone Aug retail sales and German Aug factory orders declined.  Also, the dovish minutes from the ECB’s September meeting undercut EUR/USD when the minutes stated that some policymakers saw a 50 bp rate hike as sufficient given recession risks. 

Eurozone Aug retail sales fell -0.3% m/m, right on expectations, and the third straight month sales declined.

German Aug factory orders fell -2.4% m/m, weaker than expectations of -0.7% m/m and the biggest decline in 5 months.

The German Sep S&P Global construction PMI fell -0.8 to 41.8, the steepest pace of contraction in 1-1/2 years.

USD/JPY (^USDJPY) today is up +0.06%.  The yen today is slightly lower as higher T-note yields weigh on the yen.  Also, today’s rally in the Nikkei Stock Index to a 2-week high reduced the safe-haven demand for the yen. 

December gold (GCZ2) is up +1.6 (+0.09%), and December silver (SIZ22) is up +0.071 (+0.35%).  Precious metals this morning are slightly higher.  Metals found support today after a larger-than-expected increase in U.S. weekly jobless claims bolstered speculation that a weaker labor market may prompt the Fed to soften its aggressive monetary stance.  Gains in metals were limited today due to a stronger dollar and higher global bond yields.  Gold prices continue to be undercut by fund liquidation as long positions in gold ETF’s dropped to a 2-1/4 year low Wednesday. 

Canada’s trade surplus shrinks as WTO warns of slowdown in global trade

Canada posted a smaller-than-expected merchandise trade surplus in August, with lower commodity prices and export volumes leading to the smallest monthly trade surplus this year.

The surplus – goods exports, minus imports – fell to $1.5-billion in August, from $2.4-billion in July, Statistics Canada said Wednesday. Economists were expecting a $3.5-billion surplus.

Exports declined 2.9 per cent from the previous month, while imports fell 1.7 per cent, a further sign of slowing economic growth in Canada and abroad.

The latest trade numbers arrived the same day the World Trade Organization warned of a sharp slowdown in global trade in the second half of 2022 and into 2023. The WTO said it expects global merchandise trade volumes to grow just 1 per cent next year, down from its previous estimate of 3.4 per cent.

“The picture for 2023 has darkened considerably,” WTO director-general Ngozi Okonjo-Iweala said in a press conference on Wednesday.

“Today, the global economy faces a multipronged crisis. Monetary tightening is weighing on growth across much of the world, including in the United States. In Europe, high energy prices are squeezing households and businesses and in China, COVID-19 outbreaks continue to disrupt production and ordinary economic life,” she said.

Eric Reguly: Everyone will be a victim of the energy crisis, even the electric car industry

On the brink of a global recession, hopes dim for a soft landing for Canada’s economy

The WTO is the latest organization to warn of a steep drop in global economic activity as a result of aggressive interest rate hikes and the geopolitical crisis caused by Russia’s invasion of Ukraine. The World Bank said last month that central banks risk triggering a global recession by raising interest rates too much and ignoring “potential spillovers of globally synchronous tightening of policies.”

For much of the year, Canadian trade has benefited from global events that drove up the price of oil and other commodities that Canada exports. But energy prices have retreated in recent months as the world economic growth outlook has dimmed. This spurred the Organization of the Petroleum Exporting Countries to announce plans on Wednesday to slash oil production by two million barrels a day to support prices.

Canada’s energy exports fell 6 per cent in August, driven mostly by a drop in prices. The decline, however, went beyond energy shipments.

Exports fell in seven of 11 product categories.

The decline in imports was led by a 9.5-per-cent drop in car and light truck imports, and a 7.4-per-cent decline in engines and other car parts.

“Normally, motor vehicle production in North America rebounds in the month of August after slowing down in July due to planned summer shutdowns, which affects imports. However, since the industry continues to be impacted by supply chain issues, the rebound in production was more modest in August this year,” Statscan said.

Canada continued to import more services than it exported in August, owingin part to Canadians spending on foreign vacations, leading to a $1.9-billion service trade deficit that month. Combining the services trade deficit and the merchandise trade surplus, Canada posted an overall trade deficit with the rest of the world of $369-million – its first negative trade balance this year.

“Looking ahead, a stabilization in oil prices and prospects for agricultural exports to drive some growth later in the year should see the goods surplus remain modestly in positive territory,” Canadian Imperial Bank of Commerce senior economist Andrew Grantham wrote in a note to clients. “However, with travel still having room to recover and drive a further widening of the services deficit, the overall trade balance could remain in negative territory.”

OPEC+ to cut oil production by 2 million barrels per day to shore up prices, defying U.S. pressure

• OPEC and non-OPEC partners on Wednesday agreed to impose deep output cuts, seeking to spur a recovery in oil prices despite U.S. pressure to pump more.
• Crude prices have fallen to roughly $80 a barrel from more than $120 in early June amid growing fears about the prospect of a global economic recession.

A group of some of the world’s most powerful oil producers on Wednesday agreed to impose deep output cuts, seeking to spur a recovery in crude prices despite calls from the U.S. to pump more to help the global economy.

OPEC and non-OPEC allies, a group often referred to as OPEC+, decided at their first face-to-face gathering in Vienna since 2020 to reduce production by 2 million barrels per day from November.

https://www.cnbc.com/2022/10/05/oil-opec-imposes-deep-production-cuts-in-a-bid-to-shore-up-prices.html

ENERGY

Oil prices edge higher ahead of OPEC+ meeting to discuss supply cuts

Oil prices edged up on Tuesday as expectations that OPEC+ may agree to a large cut in crude output when it meets on Wednesday outweighed concerns about the global economy.

Brent crude futures rose $1.80, or 2.03%, to $90.67 per barrel after gaining more than 4% in the previous session.

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A DAY AGO

U.S. crude futures rose by $1.66, or 1.98%, to $85.25 a barrel. The benchmark gained more than 5% in the previous session, its largest daily gain since May.

Oil prices rallied on Monday on renewed concerns about supply tightness. Investors expect the Organization of the Petroleum Exporting Countries and its allies, known collectively as OPEC+, will cut output by more than 1 million barrels per day at their first in-person meeting since 2020 on Wednesday.

Voluntary cuts by individual members could come on top of this, making it their largest cut since the start of the Covid-19 pandemic, OPEC sources said.

“Despite everything going on with the war in Ukraine, OPEC+ has never been this strong and they will do whatever it takes to make sure prices are supported here,” said Edward Moya, a senior analyst with OANDA, in a note.

OPEC+ has boosted output this year after record cuts put in place in 2020 due to demand destruction caused by the Covid-19 pandemic. But in recent months, the organization has failed to meet its planned output increases, missing in August by 3.6 million bpd.

“Whilst OPEC+ might announce a large cut [in excess of 1 million bpd], in reality, the cut could be much smaller. This is due to most OPEC+ members producing well below their target production levels,” ING analysts said in a note.

The production cut being considered was justified by the sharp decline in oil prices from recent highs, said Goldman Sachs, adding that this reinforced its bullish oil view.

Concerns about the global economy could cap the upside, said Tina Teng, an analyst at CMC Markets, as investors also look to take profit on gains made in the previous session.

“Uncertainties remain in the global markets, such as bond market turmoil, the sell-off in risk assets, and a skyrocketing U.S. dollar,” said Teng.

Oil prices have dropped for four straight months as Covid-19 lockdowns in top oil importer China curbed demand while interest rate hikes and a soaring U.S. dollar pressured global financial markets. Major central banks have embarked on the most aggressive round of rate rises in decades, sparking fears of a global economic slowdown.

U.S. crude oil stocks were estimated to have increased by around 2 million barrels in the week to Sept. 30, a preliminary Reuters poll showed on Monday.