Supply, Interest Rate Pressures

The drum beat ends this week as Federal Reserve officials finally gather to discuss interest rate increases that seem all but inevitable now. All eyes are now fixated on Janet Yellen and the board of governors as sentiment remains fettered to sell-offs related to the tightening of monetary policy in the world's largest economy. Losses were not only present on the New York Stock Exchange but across the globe in Asian and European markets. As the Dow Jones Industrial Average lost a small -0.38% today, European equities markets followed suit with the Stoxx Euro 50 falling just over half a percentage point. Currently, the Japanese market trades up and China down, both reacting to Asian economic outlook that appears rough. The thought lingers, perhaps rate hikes are not meant to happen. But a Bloomberg article cites the advice of a Federal Reserve man in 2014, don't wait to raise rates, "the situation is never clear, just unclear in another way." Stanley Fischer's comments ring true when you look at investor psychology surrounding just the suggestion of interest rate increases. The longer uncertainty shrouds the macroeconomic policy of the Fed, the longer ambiguity keeps its volatile hold over the markets. If the market is efficient, raise rates and let the most accurate economic barometer inform people on financial health, prices. The Federal Reserve, though wary in removing its hand from the fragile system it has rebuilt since 2008, needs to allow the invisible hand to set things straight for them. As projected economic performance appears to be in peril amidst worries of monetary tightening, crude oil prices are seeing a similar taut environment as demand and supply data jockey each other over investor sentiment.For that reason, directional movement in the futures' price has been muted by bulls and bears splitting volume (down to 292,000 today); consequently, the lateral movements have been rather limp and seem to be waiting for something.

The absence of a fundamental move leaves energy markets to stall as well as crude oil contracts to avoid forming a trend. Economists and analysts can make all the comments and projections they want. Goldman Sachs could projection $10 oil in the coming months, and no one would be convinced they were correct. An aura of consternation will preserve lateral movement until something big happens. I would predict no movements outside Bollinger Bands and maybe even one standard deviation away from the middle until something like interest rate hikes occur. Fundamental changes will be the driver of any price changes as the market goes forward.

The charts above describe the supply side crude oil fundamentals in the United States as stated by the Energy Information Administration. The top shows the tapering off of daily production in the U.S. In a month, energy firms have cut production almost 300,000 barrels per day since the 9.4 million barrel per day production peak at the beginning of August. As cuts approach the 9 million, investors should expect more bullish pressure on prices as weekly data is produced and adjusted throughout the month. Production decreases of 300,000 a month would leave cumulative levels around 8.2 million a day, With seasonality taken into account, demand should level off enough to make the fundamental gap wide enough to be bullish by the new year. Another data entry that is often looked at is crude oil stock count that shows the accumulation of unused petroleum throughout the United States. This statistic may not always be the best to predict prices in the future, but it can be a signal of how crude input levels in refineries to make fuels and other petrol products. The monthly data above show a new peak coming out of the month after a small drop. This could be due to preparation for refinery slowdowns in the fall and winter months as well as the slower driving demand in this period. Overall, rising stocks can provide a thin layer of bearish sentiment. Stalled crude oil that needs storage costs money to transport and be preserved pressuring operating expenses across the energy sector. At the same time, companies will only store oil, investing more in its value, if they see a rise in prices coming. Perhaps, this small blip in stock numbers suggests that there will be better hedging opportunities in the near future. In the end, the EIA and OPEC will be crucial to the continuation and possible conclusion of the supply glut. Investors will continue to keep one eye on this data as it remains a key price mover for futures contracts and energy stock.