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How Long Will The Oil Price Fear Premium Last – OilPrice.com
The oil price rally got a big boost last week with the assassination of the Iranian General Qassem Soleimani. Will that be enough for prices to continue increasing or will they flatten and decline in coming weeks?
Markets are presently engaged in “fear premium” price discovery. So far, the fear premium is modest. At this writing, WTI is $63.56, $0.51 higher than its close of $63.71 on Friday; Brent is $0.71 higher at $69.31.
WTI prices have increased 21% since early October (Figure 1) exceeding the $62 level of the September Saudi refinery attacks.
Figure 1. WTI price exceeded level of September 2018 Saudi refinery attack on January 3, 2019. Source: Quandl and Labyrinth Consulting Services, Inc.
Previous 2019 rallies reached similar levels before failing. That is because they were based mostly on expectations of supply constraints and not on actual market tightness. When the reason for that expectation disappeared, prices fell. The latest rally probably represents more of the same.
It has required more substance to continue than previous surges. Markets are wary and needed something more tangible than possibility. In late November, a new OPEC+ production cut and a U.S. China trade pact provided the jab and the cross within days of each other.
Just as the rally was losing momentum again, it got another boost when a U.S. drone killed Qassem Soleimani on January 3. The specter of war pushed WTI prices to a 9-month high.
There are two reasons why Soleimani’s death will probably not be enough to sustain the price rally for long unless open conflict with Iran occurs. Related: OPEC Oil Production Falls As Laggards Begin To Comply
The first reason is implied volatility. Volatility is the degree of daily price variation, not the level of prices themselves. Implied volatility and oil price ordinarily correlate negatively: high volatility signals lower oil prices and conversely, low volatility characterizes periods of price increase. There are exceptions to this empirical observation.
Figure 2 shows implied oil-price volatility since 2000. The greatest volatility responses were from the 2008-2009 Financial Collapse, the Arab Spring uprisings in 2011, the oil-price collapse of 2014-2015 and the attack on Saudi oil refineries in September of last year.
Last week’s volatility was much less significant than those. It was also less significant than most smaller spikes over the last decade.
Figure 2. Oil-price volatility accompanying the Soleimani assassination was subdued compared to other volatility events since 2000. Source: EIA, Quandl and Labyrinth Consulting Services, Inc.
Brent front-month price increased +$2.35 to $68.60 on January 3 when the assassination was announced but it had fallen -$1.91 to $66.25 the week before (Figure 3). The 3-month price rally may have been losing momentum. Soleimani’s death merely adjusted the rally back to its earlier trajectory.
Figure 3. Brent front-month price increased +$2.35 to $68.60 on January 3 but it had fallen -$1.91 to $66.25 before Soleimani’s assassination. This suggests that the 3-month price rally may have been losing momentum. Source: EIA and Labyrinth Consulting Services, Inc.
The second reason why this event may not have lasting effect on oil prices is that the resulting “fear premium” has been relatively small so far.
The latest price increase indicates only about a $2.50 WTI and $3.50 Brent “fear premium” based on comparative inventory data. Comparative inventory (C.I.) vs WTI spot price for December plots on the blue yield curve for 2015 through 2019 (Figure 4). This indicates that WTI should be approximately $61/barrel at that inventory level. The January 3 futures closing price of $63.04 was, therefore, only about $2.00-$2.50 over-valued.
Figure 4. WTI $63 front-month price includes about $2.00 “fear premium” based on the blue 2015-2019 comparative inventory yield curve. Source: EIA and Labyrinth Consulting Services, Inc.
The relatively flat slope to the yield curve reflects a low sense of supply urgency by oil markets. This is consistent with the limited price response a few months ago to attacks on Saudi oil refineries. That had an immediate effect on physical oil supply. There is no reason to expect that the more abstract potential for future supply loss from this event should have more effect on oil prices. Related: The Hottest Permian Takeover Targets For 2020
Low fear premium and price volatility suggest that markets probably do not consider Soleimani’s assassination a substantive cause for more than a temporary spike in oil prices.
And then there’s the Trump factor. The American president’s quarrel with Iran has been a key component in the three major oil-price rallies of 2019 and 2020.
His threat to block Iranian oil exports was the main reason for the April to October 2018 price increase (Figure 5). When he reneged and granted waivers, oil prices collapsed. The catastrophic investor losses because of this head-fake cannot be understated. Trump’s mood swings add uncertainty to an already risky market and are one of the main reasons that investment money has been on the side lines for oil.
Figure 5. U.S. – Iran tensions have been a factor in the price rallies of 2019 and 2020. Source: Quandl and Labyrinth Consulting Services, Inc.
Last week’s assassination of Soleimani marks the third time in less than two years that the Trump administration’s policy toward Iran has been a key factor in oil price rallies and failures. Markets have learned painfully that the American president’s bluster has faded in the fact of conflict.
Conflict might break out and, if it does, prices will surge. It is more likely that markets will revert to the proverb: Fool me once, shame on thee; fool me twice, shame on me.
We’re beyond twice.
By Art Berman for Oilprice.com
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Stock Market News Today, 7/06/23 – Stocks End Mixed as Nasdaq Leads Indices Lower – TipRanks
Last Updated 4:00 PM EST
Stock indices finished today’s trading session mixed. The Nasdaq 100 (NDX) and the S&P 500 (SPX) fell 1.75% and 0.38%, respectively. Meanwhile, Dow Jones Industrial Average (DJIA) gained 0.28%.
Furthermore, the U.S. 10-Year Treasury yield increased to 3.79%, an increase of more than 12 basis points. Similarly, the Two-Year Treasury yield also increased, as it hovers around 4.56%.
The Atlanta Federal Reserve updated its latest GDPNow reading, which allows it to estimate GDP growth in real-time. The “nowcast” becomes more accurate as more economic data is released throughout the quarter. Currently, it estimates that the economy will expand by about 2.2% in the second quarter.
This is higher than its previous estimate of 2%, which can be attributed to recent releases from the U.S. Census Bureau, the Institute for Supply Management, and the U.S. Bureau of Labor Statistics.
Last updated: 1:50PM EST
Stocks are mixed so far in today’s trading session. As of 1:50 p.m. EST, the Nasdaq 100 (NDX) and the S&P 500 (SPX) are down 1.5% and 0.4%, respectively. Meanwhile, Dow Jones Industrial Average (DJIA) is up 0.2%.
Surprising market observers, the Bank of Canada hiked its primary policy rate by 25 basis points, raising it to 4.75% on Wednesday. The bank cited persistent underlying inflation as the main driver for this decision, marking a departure from two consecutive meetings where the rate was held steady.
The bank also continues with its policy of quantitative tightening, indicating a response to worldwide economic growth that’s weakening due to increased interest rates. “Major central banks are signaling that interest rates may have to rise further to restore price stability,” the bank stated.
This unexpected move initially boosted the Canadian dollar but has since lost some ground as it hovers around C$1.338 per US$1. The rate increase follows a rise in CPI inflation to 4.4% in April, its first surge in 10 months, and a stronger-than-anticipated GDP of 3.1% in Q1.
The Bank of Canada’s Governing Council asserts that the rate hike is in response to previous policy not being restrictive enough to balance supply and demand and bring inflation sustainably back to the 2% target.
As a major trading partner, what happens in Canada usually has ripple effects in the U.S. Thus, this could be a sign that the Federal Reserve might have to continue hiking as well going forward.
Last updated: 10:55AM EST
Stocks have turned red so far in today’s trading session after a positive start. As of 10:55 a.m. EST, the Nasdaq 100 (NDX) and the S&P 500 (SPX) are down 0.9% and 0.2%, respectively. Meanwhile, Dow Jones Industrial Average (DJIA) is near the flatline.
Last updated: 9:50AM EST
Stocks ticked higher at open on Wednesday morning even as the trade deficit data showed that the United States’ trade deficit jumped 23% in April to $74.6 billion – a six-month high indicating a surge in imports. Imports were up 1.5% in April to $323.6 billion while exports fell by 3.6% to $249 billion.
The Nasdaq 100 (NDX), S&P 500 (SPX), and Dow Jones Industrial Average (DJIA) were all up by 0.6%, 0.32%, and 0.11%, respectively, at 9:50 a.m., EST, June 7.
First published: 4:38AM EST
U.S. Futures are in the red this morning after the SPX marked its highest close in trading since August 2022 yesterday. We are almost halfway through the trading week, and markets remain elevated in the absence of any negative news. Futures on the Nasdaq 100 (NDX), S&P 500 (SPX), and Dow Jones Industrial Average (DJIA) are down 0.26%, 0.15%, and 0.18%, respectively, at 4:00 a.m., EST, June 7.
On the economic front, traders await reports on the U.S. trade deficit and consumer credit due today, as well as the weekly initial jobless claims data scheduled for June 8. Meanwhile, the Chinese economy is showing signs of slowing, with May exports falling 7.5% year-over-year against the expected 0.4% decline. Also, imports fell 4.5% year-over-year, much lower than the expected 8% decline.
On the earnings front, fewer companies remain to report their quarterly results. Shares of Casey’s General Stores (NYSE:CASY) dropped 4.5% in extended trading yesterday, after missing both sales and earnings expectations. On the other hand, Dave & Buster’s (NASDAQ:PLAY) stock was up over 4% in yesterday’s extended trade following its report of mixed results, with earnings surpassing but sales missing estimates.
Furthermore, meme stock GameStop (NYSE:GME), travel service provider Trip.com Group (NASDAQ:TCOM), e-commerce platform Rent the Runway (NASDAQ:RENT), and discount chain Ollie’s Bargain Outlet (NASDAQ:OLLI) will report their results today.
Elsewhere, European indices are trading in the red today, following weaker-than-expected data from German industrial production for April. After a disastrous March, April seems to continue bleeding from poor performance. Industrial production in April grew by a marginal 0.3% month-over-month, against an expected rise of 0.7%. Economists worry that if data remains weak in May and June, the economy’s recession will spill well into the second quarter.
Asia-Pacific Markets Trade Mixed on Wednesday
Asia-Pacific indices ended the trading session mixed today, following economic data sets from different nations. Mainland Chinese and Hong Kong indices closed mixed on signs that the economy is going into a continued slowdown. At the same time, Australian indices continue their downward spiral after reporting poor GDP growth and following the Reserve Bank of Australia’s unexpected rate hike to a record high yesterday.
Hong Kong’s Hang Seng index and China’s Shanghai Composite ended the day up 0.80% and 0.08%, respectively, while the Shenzhen Component index closed down by 0.60%.
At the same time, Japan’s Nikkei and Topix indices ended down by 1.82% and 1.34%, respectively.
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