"We should not look back unless it is to derive useful lessons from past errors, and for the purpose of profiting by dearly bought experience." -- President George Washington
The week ahead looks sleepy enough, at least at a glance. Once one allows oneself to linger over the weekly docket for more than a couple of seconds, it quickly becomes apparent that this sleepy week will ramp up rather quickly as the days pass. Friday will bring with it the unofficial kick-off of earnings season, as several of our higher-profile financial institutions such as JP Morgan (JPM) , Action Alerts PLUS charity portfolio holdings Citigroup (C) and Wells Fargo (WFC) go to the tape with their quarterly numbers. Not to mention that on that very same day, the various forces that be will bestow upon us further information on consumer level inflation, industrial production, retail sales, and business inventories, all red-star-level macroeconomic events.
On the way to that noisy Friday, Fed Chair Janet Yellen will be heard from twice. First, on Wednesday, she'll testify on monetary policy and the U.S. economy before the House Financial Services Committee. Then on Thursday, the Chair will repeat that trick before the Senate Banking Committee. These twin testimonies, and the doctor's response to questioning will, despite the data coming at week's end, be what most impacts the marketplace this week. Yields and currency valuations will move around on spoken words, and then yields will move everything else. The Minutes just released showed some division on when to start the trimming of the central bank's balance sheet, the planned program also known as "quantitative tightening". You all know that I oppose tightening policy on both levels congruently. Yellen will be pressed on this, as well as the trajectory of interest rate policy. Let's not forget that Dr. Yellen also referred to asset valuations as "somewhat rich" in her recent London appearance. If this is not part of the testimony, it will almost certainly come up in the back-and-forth that comes after. The lack of both inflationary pressures and wage growth will also certainly be in focus, despite what appears to be rather robust job creation.
The pressure on crude prices continues this morning. It appears as if the commodity is leaning toward an eventual re-test of that $42.75 level that was pierced in fairly sharp fashion back in mid-June, before snapping back technically. There really are two factors here, on top of speculative flows that are going to matter going forward. Supply and demand? Well, yes, simply put. Although I was thinking more along the lines of OPEC's behavior in the face of their policy failures, as well as of the response of the U.S. shale crowd to recent weakness in the space.
Since we did mention demand, it is still there, and growing, most of the growth coming from developing economies. As long as that's true, then production cuts and freezes are still a viable strategy going forward. Price discovery just may not be exactly what sellers had anticipated. First, let's take a look at OPEC. We now know that the rest of OPEC is starting to lose patience with both Libya and Nigeria. Both of whom, being exempt from the OPEC cuts previously agreed to due to civil unrest that hampered their economies, have seriously increased production. Over the last nine months, Libyan production is up more than 600,000 barrels a day, while Nigeria's is up 200,000 barrels a day. Given that the agreed-upon cuts by the entire cartel were meant to withhold 1.8 million barrels of oil from hitting the market every day, this is dramatically counter-productive to the group's mission.
Russia is hosting a meeting of oil producers in St. Petersburg two weeks from today. Several OPEC oil ministers have called for attendance at these meeting by officials from both Libya and Nigeria. Now, both are likely to resist, but my guess is that if they are indeed asked to attend, crude will see some appreciation in price ahead of that meeting, as markets misunderstand the fact that even if the two nations are asked to cut back, OPEC will not likely vote on such a matter until the next official meeting in November. Then there will be questions about cooperation. Still, the event, from a trader's perspective, could/will be playable.
Slowing (Where It Counts) Rig Count
Then there is U.S. shale production. We all know that story. U.S. production returned to growth this year (+11% y/y) as frackers filled gaps left open by production cuts elsewhere. The gang in the Permian Basin, due to technological improvements, have made huge gains in efficiency lowering breakeven points. At current market prices, U.S. production will likely land above 10 million barrels a day in 2018. Remember, for every one dollar per barrel move in the market price of WTI crude, analysts move their 2018 projections for supply up or down by about 100,000 barrels per day. In short, the U.S. is here to stay, gang.
That said, the proliferation of oil-producing rigs across the Permian Basin has stalled. Yes, I saw the rig count get back on track last Friday. Yes, U.S. oil rigs currently producing grew by seven rigs to 763 on the week. However, four of those rigs were in Alaska. Producing rigs located in the Permian actually dropped by one. In fact, rigs in the Permian are only showing a +1 in aggregate over the last four weeks. So, as low as break-even points are in Texas and New Mexico, that crew is not impervious to price pressures.