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Morning Commentary

History...Still in the Making

By Charles Payne, CEO & Principal Analyst
11/8/2017 9:41 AM
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Like clockwork, the Dow Jones Industrial Average spurted to another all-time high into the close, its 75th since Election Day one year ago today. 

That’s the Trump Rally!  No matter your political leaning, there’s no denying that it’s been a remarkable year, and everyone that invested in America via the stock market got paid big time!

I think they will continue to get paid big time.

Sloppy Session

For the most part, this was a sloppy uninspiring session on Tuesday; a couple of earnings duds, coupled with more angst about the tax bill at home and risks around the world, took some wind out of the rally: 

NYSE

NASDAQ

Then we have the crude oil rally:

Much has been made of the stealthy move in the oil patch with some commentators tying it to the recent power upheaval in Saudi Arabia.  Although that story is filled with intrigue, the most important news from the Middle Kingdom is its commitment to clean up the global oil glut. 

The glut was triggered by Saudi Arabia in 2014, in an effort to derail the U.S. fracking miracle.

At the time, I thought perhaps there would be a pyrrhic victory; however, the result has been much worse.

When Saudi Arabia began flooding the world with crude, its foreign reserve was a record $737 billion, and crude traded north of $100 a barrel. Today, crude oil is down 46% from its highest point of $106 in June 2014. The Saudi foreign reserve is down to $487 billion, its lowest level since early 2011.

Crying Uncle

The Organization of the Petroleum Exporting Countries (OPEC) cried “uncle,” and Russia said “me too,” as nations announced production caps that they have largely lived up to.  Meanwhile, crude continued to fall as U.S. producers began turning on rigs to take advantage of their victory. The rebound has largely been a Texan story, led by growth in the Permian Basin.  Of the 406 additional current rigs in North America, 248 are in the Permian Basin.

Moreover, North American rig counts began declining in all other regions since August. 

The next component to the oil rally was demand, which began picking up around the world; domestically, it has been reflected in crude oil inventories. Virtually every week has seen drawdowns since crude inventories topped out at an all-time high of 535 million barrels during the week of March 24th.

The combination of OPEC caps, rig counts plateauing and increasing demand, it gave crude that old one-two-three punch, lifting West Texas Intermediate (WTI) 36%. Since hitting $42 in June when conventional wisdom called for a “three handle,” some were even predicting a “two handle.”  

The best news on oil came from one of the bigger players in the frac sand industry – U.S. Silica Holdings (SLCA). Last night, the company posted results that beat on revenue and earnings, and offered upbeat guidance for the quarter and next year:

“For 2018, the Company expects another strong year, driven by record demand for frac sand…”

By the way, OPEC issued a report stating crude oil demand wouldn’t peak before 2040. 

There are so many factors that determine the price of crude. The current rally can move higher, and I certainly don’t think there is any geopolitical risk built in (not like it did years ago) when there was serious Middle East saber-rattling.

All year long, I thought $55 (perhaps $60) was possible, but I’m surprised that those levels were reached so fast and so quietly.

Today’s Session

The markets opened in the red this morning.  AT&T today announced that they are “uncertain” when the deal with Time Warner (TWX) will close.  It was originally anticipated that it would be by year-end. However, anti-trust uncertainties are at play.  Both stocks are down this morning, but TWX is feeling the most impact, down 3%.

 


 

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