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Crude oil prices are soaring as production slows

A global energy crunch could help propel oil prices above US$100 a barrel for the first time since 2014 and spur a global economic crisis All eyes are…

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This article was originally published by Canadian Investor

A global energy crunch could help propel oil prices above US$100 a barrel for the first time since 2014 and spur a global economic crisis

All eyes are focused on the Organization of Petroleum Exporting Countries and its allies in OPEC+ as they meet today. With crude oil prices touching US$80 a barrel and prospects of hitting US$100 this winter looming large, markets are on edge.

The market trajectory is virtually impossible to delineate.

A global energy crunch could help propel oil prices above US$100 a barrel for the first time since 2014 and spur a global economic crisis, reports Bank of America.

The boost in crude oil prices would be driven by three factors:

  • switching from gas to oil because of high gasoline prices;
  • a jump in crude consumption over a cold winter;
  • higher aviation demand as the United States reopens its borders.

“If all these factors come together, oil prices could spike and lead to the second round of inflationary pressures around the world,” Bloomberg reported, quoting analysts, including Francisco Blanch. “Put differently, we may just be one storm away from the next macro hurricane.”

In the meantime, issues about how much OPEC+ could add to its output continue to confound analysts. Bob Yawger at Mizuho Financial Group said there are questions about whether members could add supply.

But there are practical restraints. Only a few members can afford to increase production. “So, it’s really paying lip service to say you can increase significantly,” Yawger said.

The surge in gasoline prices has hit the oil market hard.

Gas prices are hovering around US$190 a barrel. So some large gas consumers – electricity generation, heating and manufacturing, for example – are being forced to switch from gas to oil products.

Surging liquefied natural gas (LNG) prices are also prompting utilities across Asia and the Middle East to burn more high-sulphur fuel oil than usual. Generators in major consuming areas like Pakistan, Bangladesh and the Middle East have reportedly started switching fuels. Pakistan’s fuel oil imports this year are reportedly already about 65 per cent above 2020 levels.

Lack of progress on negotiations between Iran and the U.S. on a nuclear deal also dampens the possibility of additional oil supplies from Iran in the immediate term. That means the world is relying on OPEC+ even more than usual to meet its needs.

So political pressure on OPEC+ is growing.

“Obviously, the price of oil is of concern,” White House press secretary Jen Psaki said last week. High oil prices were on national security adviser Jake Sullivan’s agenda when he met with Saudi Crown Prince Mohammed bin Salman, Psaki said.

Concern in China, the world’s largest crude importer, is also growing. China faces a potential economic slowdown because of the debt crisis enveloping property developer Evergrande and a growing power shortage, leading to rising crude prices hitting factories, homes and supply chains.

In an unprecedented move – and what’s being called a message to OPEC and its allies that the current crude price trajectory is unacceptable – China announced it was selling oil from its strategic reserves. While that didn’t lower prices, it did send a powerful message.

But OPEC+ seems to be taking its time opening its taps more than what has already been announced – 400,000 barrels per day of additional output every month until the entire output cut of 5.8 million bpd is accounted for.

OPEC+ is first likely to wait to see if the natural gas deficit bolsters oil demand “materially” before speeding up the return of crude output, said Amrita Sen, chief oil analyst at Energy Aspects Ltd. In a COVID-19-afflicted world, OPEC+ eyes would remain fixed on oil demand patterns.

But OPEC+ is also aware that any further spike in crude prices – just weeks before world leaders gather for a fresh round of climate talks to shift the world away from fossil fuels – could be disastrous for oil fortunes as it boosts political support for the transition to renewable energy.

At best, OPEC+ could seek to reach a crude oil production midpoint.

By Rashid Husain Syed
Columnist
Troy Media

Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has been asked to provide his perspective on global energy issues by both the Department of Energy in Washington and the International Energy Agency in Paris.

Courtesy of Troy Media


Author: Editor

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Economics

S&P, Dow Jones climb to fresh highs ahead of big tech earnings

The S P 500 Index and Dow Jones closed at record highs on Monday October 25 ahead of quarterly earnings of big technology companies like Apple Amazon…

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The S&P 500 Index and Dow Jones closed at record highs on Monday, October 25, ahead of quarterly earnings of big technology companies like Apple, Amazon, and Alphabet this week.

The S&P was up 0.47% to 4,566.48. The Dow Jones rose 0.18% to 35,741.15. The NASDAQ Composite rose 0.90% to 15,226.71, and the small-cap Russell 2000 rose 0.93% to 2,312.64.

Market participants are in high spirits as the third-quarter earnings season is in full swing. Several major financial and retail companies have reported robust growth in the quarter.

The earnings come in the backdrop of inflation, supply disruptions, and labor shortages. Hence, some analysts were initially worried over quarterly performance amid these factors.

Traders will now eagerly wait for the earnings of mega-cap technology companies that have around 30% weightage on the S&P 500 index by market capitalization.

According to Refinitiv data, some 165 S&P 500 companies are expected to report this week. Analysts expect the index to grow by 34.8% in the quarter YoY.

In addition, of the 119 companies reported so far, 83.2% beat Wall Street estimates.

On Monday, consumer discretionary and energy stocks led gains on S&P. Utilities and financial stocks were the bottom movers. Nine of the 11 stock segments of the index stayed in the green.

Shares of Tesla, Inc. (TSLA) jumped 12.66% at the market close on Monday, taking its market cap to more than US$1 trillion for the first time, as the car rental company Hertz said it placed an order for 100,000 Tesla vehicles. Morgan Stanley also raised its price target to US$1,200 from US$900.

PayPal Holdings, Inc. (PYPL) stock was up 2.70% after it said it had no plan to buy Pinterest Inc. (PINS). Media reports had earlier claimed that it was in talks to acquire the social media firm for US$45 billion in a stock-and-cash deal. The PINS stock fell 12.71% after PayPal’s clarification.

Facebook, Inc. (FB) shares jumped 3.78% in after-market trading after missing analysts’ expectations in the third quarter. Its revenue surged 35% YoY to US$29.01 billion in Q3, FY21, and its net income rose 17% to US$9.19 billion, or US$3.22 per diluted share. Analysts had predicted diluted EPS of US$3.19 on revenue of US$29.57 billion, Refinitiv data showed.

In the consumer discretionary sector, Home Depot, Inc. (HD) rose 1.44%, LOWE’s Companies, Inc. (LOW) rose 1.33%, and Target Corporation (TGT) gained 1.73%. TJX Companies, Inc. (TJX) and Aptiv PLC (APTV) advanced 1.71% and 1.13%, respectively.

In energy stocks, Exxon Mobil Corporation (XOM) increased by 1.95%, ConocoPhillips (COP) rose 1.06%, and EOG Resources, Inc. (EOG) gained 2.22%. Schlumberger N.V. (SLB) and Kinder Morgan, Inc. (KMI) ticked up 1.33% and 1.02%, respectively.

In the utility sector, Duke Energy Corporation (DUK) declined 0.91%, Dominion Energy, Inc. (D) fell 1.02%, and American Electric Power Company, Inc. (AEP) fell 1.06%. Xcel Energy Inc. (XEL) and WEC Energy Group, Inc. (WEC) plummeted 1.36% and 1.40%, respectively.

Also Read: Top companies to watch for quarterly earnings this week

Also Read: Seven most anticipated IPOs this week

Nine of the 11 stock segments of the S&P 500 index stayed in the green.

Also Read: Kimberly-Clark revenue up 7%, OTIS raises 2021 outlook

Futures & Commodities

Gold futures were up 0.71% to US$1,809.05 per ounce. Silver increased by 0.83% to US$24.652 per ounce, while copper rose 0.70% to US$4.5293.

Brent oil futures increased by 0.58% to US$85.13 per barrel and WTI crude was down 0.08% to US$83.69.

Also Read: Top artificial intelligence stocks to explore amid AI boom

Bond Market

The 30-year Treasury bond yields was down 0.37% to 2.083, while the 10-year bond yields fell 1.36% to 1.633.

US Dollar Futures Index increased by 0.21% to US$93.817.






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Economics

3 Things The Fed Must Do To Normalize Bond Markets

3 Things The Fed Must Do To Normalize Bond Markets

Authored by Brendan Brown via The Mises Institute,

By late in the second decade of the…

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3 Things The Fed Must Do To Normalize Bond Markets

Authored by Brendan Brown via The Mises Institute,

By late in the second decade of the twenty-first century, we could say that the long-term US interest rate market had been dysfunctional for a long time. We could identify the starting point as being the immediate aftermath of the Nasdaq bust and recession of 2000/01. In signalling that the rise in the Fed funds rate would be slow and gradual over a prolonged period (described by central bank watchers as a pre-commitment to a given rate path), the Greenspan Fed put an unusual dampener on long-term interest rates at the time—in hindsight the start of manipulation under the 2% inflation standard and a powerful impetus to the asset price inflation which started to form during that period. Many contemporary market critics, including senior monetary officials, attributed the “artificially low” long-term rates not to their own manipulations in the short-term rate markets but to such factors as the “Asian savings surplus”. Indeed, Federal Reserve speakers stimulated that particular speculative narrative followed widely by carry traders (including prominently the “Asian savings surplus”!) in search of term risk premium to bolster the meagre returns available in the money markets. (It is also possible that the only contained rise of long-term rates at this time reflected widespread concern that present asset inflation would end with a bust and that indeed the long series of Fed rate rises could end in speculative over-kill).

Even so the corruption of signalling in the long-maturity interest rate markets in the early 2000s paled in comparison to what was to occur under the use of the non-conventional tool box in the second decade. And the central bankers added to the corruption by citing the low long-maturity interest rates as evidence that the so-called neutral level of interest rates had indeed fallen. Yes it was a puzzle why ostensibly low long-term rates were not sparking strong growth of capital spending. Central bankers, however, were not ready to embrace the obvious explanation that their monetary manipulations had created such huge uncertainty which discouraged long-run investment spending. In particular, if almost everyone and their dog realized that a wide range of asset prices—including, crucially, equities—had become hot due to the monetary manipulations and that they were likely to crash within a few years, this would surely restrain capital spending especially for long-gestation projects to well below levels which would pertain if the hot prices were for real.

And so the prevailing central bank doctrine became long-term rates were not very different if at all from neutral. Yes, it made sense for central banks to gradually shed their huge portfolios of long-maturity debt built up during the active years of [quantitative easing] QE, but they should be ultra-cautious not to set off a snowball process of rising long-term rates and falling asset prices. Gradual should be the order of the day—or, better yet, glacial. And to match, the rise in short-term rates strictly under the control of the authorities should proceed very cautiously.

There was an alternative to the phoney normalization programme, which in any case could readily implode along the way. This would have been to turn the clock back on interest payments on reserves (permanently zero again as before 2008) accompanied by immediate action to restore the monetary base to a normal proportion of the broader money supply. Yes, long-term rates could well jump under this programme, and there could be some decline in asset prices (from the sugar highs of peak asset price inflation). But the return of reliable signalling could also have gone along with a new robustness in spending, especially capital spending, given no longer the malaise of “artificial” capital prices which could break at any point.

Policy normalization – defined as closing down the non-conventional tool box and restoring a well-functioning price signalling mechanism to the bond market – is in fact multi-dimensional.

  • At the most fundamental level, it requires abandoning the 2% inflation standard – in particular its ignoring of the natural rhythm of prices over time.

  • The second dimension is to get the monetary base back to the pivot of the monetary system. This means no payment of interest on reserves and the supply of monetary base in line with demand as consistent with a non-inflationary path forward.

  • The third dimension is getting the share of long-maturity government debt in the total liabilities of the government sector (including the central bank) back to normal proportion. That can be accomplished over a period of many years.

Action in the second dimension can take place very quickly. The central bankers take their portfolio of long-maturity bonds to the Treasury and exchange them for short-maturity Treasury bills (T-bills). The central bank conducts open market operations in Treasury bills (short maturity) to shrink the monetary base to “normal”. Of course there is much ambiguity about where is normal, and so the process of normalization on this dimension could go along with some considerable monetary turbulence for some time. That is an inevitable consequence of the huge experiment.

The normalization in the third dimension starts from the situation where the Treasury department, looking at the consolidated balance sheet of the Treasury and central bank, admits that years of QE mean in effect that an abnormally large share of government bonds outstanding are in the form of floating rate short maturities. Traditionally such a high proportion of floating rate is seen as exposing the central bank to large political pressure not to raise the short-term rates under their control (because of direct funding cost implications in terms of budget deficit)—even when it suspects that monetary inflation has got under way.

If the central bank buckles under such pressure, then it becomes indeed an important source of tax collections for the government – in the form of inflation tax. One form is the suppression of interest rate income (to below what would be the case under sound money) on Treasury paper – the other is the capital tax (in real terms) on government bonds and monetary base enacted by inflation erosion.

*  *  *

This article is a selection from The Case Against 2 Per Cent Inflation: The Negative Rates to a 21st Century Gold Standard (Palgrave Macmillan, 2018).

Tyler Durden
Mon, 10/25/2021 – 15:40












Author: Tyler Durden

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Economics

3 Top Stock Trades for the Week

Editor’s Note: This article is updated weekly to bring you fresh trade ideas.

The risk-on rally is continuing in earnest on Monday. Headlines will…

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Editor’s Note: This article is updated weekly to bring you fresh trade ideas.

The risk-on rally is continuing in earnest on Monday. Headlines will point to the S&P 500 pushing to a new record high, but what traders should find most impressive is the breadth of participation. Buyers aren’t just coming after stocks. They’re scooping up commodities and crypto too. Given the tailwind, this week’s update to the top stock trades gallery features three bullish ideas.

In scouting for the best opportunities, I found a diversified list to give you plenty of options.

First up is a red-hot retailer that has made bank of the post-pandemic economic recovery. Next comes an exchange-traded fund (ETF) offering a path to play a potential year-end breakout in small caps. Finally, we’ll break down a steel company that’s ramping after passing a recent earnings test.

That said, here are the tickers:

  • Dick’s Sporting Goods (NYSE:DKS)
  • iShares Russell 2000 ETF (NYSEARCA:IWM)
  • Steel Dynamics (NASDAQ:STLD)

As always, we’ll do a quick rundown of each chart, followed by an options trade.

Top Stock Trades: Dick’s Sporting Goods (DKS)

Source: The thinkorswim® platform from TD Ameritrade

Earnings growth for Dick’s Sportings Goods has been explosive over the past 18 months. Its best quarter EPS in the year before the pandemic was $1.26. It just reported $5.08. Its share price has reflected the incredible recovery by rising more than 10-fold from last March’s low. Spectators loath to chase will be happy to learn that DKS stock just pulled back 23% from its highs, providing a compelling chance to get in at lower prices.

The daily chart just completed an inverted head and shoulders pattern, confirming buyers are returning. Additionally, today’s 1.5% rally is pushing prices back above the 50-day moving average and suggests now is a smart time to enter.

Implied volatility is high enough to make spreads a better choice than buying calls outright.

Top Stock Trades: Buy the December $130/$150 bull call spread for $5.50.

You’re risking $5.50 for the chance to make $14.50 if DKS stock rises to $150 by expiration.

iShares Russell 2000 ETF (IWM)

iShares Russell 2000 ETF (IWM) with looming breakoutSource: The thinkorswim® platform from TD Ameritrade

If you’re hesitant to chase the S&P 500 at all-time highs, then consider shopping small-caps. The Russell 2000 Index has done nothing for the last 10 months. As a result, we have a long-term trading range that could lead to some serious upside once resistance gets breached. The silver lining of price pausing is it has allowed earnings to play catch-up and stretched valuations to become less so.

Although IWM has been unsuccessful in breaking out of its range, I think it’s just a matter of time. And, with the bullish seasonality of November and December looming, a year-end run could finally deliver what bulls have been waiting for.

Over the past two weeks, small caps have pushed toward the upper end of the range, placing us within striking distance of another resistance test.

I like using bull call spreads to profit from the expected move higher.

Top Stock Trades: Buy the December $230/$240 bull call spread for $4.

You’re risking $4 to make $6 if IWM rises above $240 by expiration.

Top Stock Trades: Steel Dynamics (STLD)

Steel Dynamics (STLD) stock chart with bullish breakoutSource: The thinkorswim® platform from TD Ameritrade

The basic materials sector benefits when inflation heats up. Nowhere has this been more apparent than in the steel industry. Consider the past four EPS quarterly numbers for Steel Dynamics: 97 cents, $2.10, $3.40, $4.96. Talk about an eye-popping profit surge! It’s no wonder STLD has doubled in price this year.

Though the stock didn’t move much after the latest report, prices are now breaking through resistance. We’re also back above all major moving averages, which clears out a lot of potential supply. Volume patterns have been heavily favoring bulls in the wake of last week’s report as well.

To capitalize on the follow-through from Monday’s breakout, consider the following idea.

Top Stock Trades: Buy the December $70/$75 bull call spread for$1.35.

You’re risking $1.35 to make $3.65 if STLD rises to $75 by expiration.

On the date of publication, Tyler Craig was long IWM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

For a free trial to the best trading community on the planet and Tyler’s current home, click here!

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Author: Tyler Craig

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