Dovish comments from the Chicago Fed President Charles Evans gave oil a bit of a boost offsetting worries about President Trump’s failed Healthcare Reform Act vote. The Fed may have President Trump's back. After speaking at a conference in Madrid, Spain, the Chicago Fed president signaled that perhaps the Fed might not raise rates as quickly as the market has been anticipating.
It seems Mr. Evans is worried that the Fed’s 2% core inflation rate that might not be reached until 2018 and that might mean the Fed may only raise rates 2 more times this year. He did say that two or three interest rate hikes in 2017 would bring interest rates close to their neutral level but if inflation is weak, then the Fed may take more time to get to that so-called natural rate.
To get there, oil and gold will have to put in better performances. The May crude oil continues to test and hold the low $47.00 a barrel area but then fails to make any real upside progress. The gold market has been slowly climbing and broke out to a 4 week high on stock-market concerns as well as a weaker dollar. The statement by the Chicago Fed Chief Evans may also be a signal that the Fed may act if the market thinks that President Trump will be stymied in his efforts to revitalize an economy that has way underperformed by historical standards. The market has been counting on tax reform and cuts and if does not get it, once again it will be up to the Fed to keep rates low to keep the growth of the economy going.
Gas prices are going. The RBOB, or gasoline, looks like a market that wants to run and should kill the complex. Refiners last week showed the first sign that they were coming out of spring maintenance and the race will be on to catch up with the summer blends of gasoline. The market will focus on gas and oil as we await tonight’s American Petroleum Institute (API) supply report.
Crude supply will also be closely watched as U.S. inventories stay stubbornly high. One week it is the last gasp of OPEC production supply before the historic cut in production. Another week it is the expectation of more supply from the Strategic Petroleum Reserves and last week it was a flood of Canadian oil imports and of course a consistent increase in shale production. But as I have warned before, the record supply in U.S. oil is taking the market focus off the big picture, which is a path to a under supplied market, by the middle of the year. With the high likelihood of an extension of OPEC production cuts and falling output in Asia, the market will go into a deficit globally. The oil trade may be starting to get it as the contango is starting to widen giving incentive for oil buyers to buy and store oil later when supplies inevitably tighten.
Another take on that comes from Reuters, which warns that a, “surge in oil hedges will spur drilling activity in the U.S., Wood Mackenzie said in a report released on Monday, likely keeping a supply response in place longer than expected even if spot prices fall sharply. "Those hoping that recent oil-price weakness will prompt U.S. producers to pull back drilling activity and ease the glut of oil supply may need to keep waiting," said the consultancy.” “Per recent disclosures, producers have rushed to hedge, or lock in, oil prices above $50 a barrel after OPEC's November announcement to cut production.In its analysis of 33 of largest upstream companies with hedging programs, Wood Mackenzie found that the companies have added an annualized 648,000 barrels a day of new oil hedges since the fourth quarter of 2016, an increase of 33 percent from the third quarter of the year and more than in any of the previous four quarters.” Per Reuters.
Of course once they are hedged, at some point, if prices exceed the hedge, there will be less selling pressure because these producers have already hedged. So, that could raise prices further down the road as there is so much oil that is essentially already sold at current levels.
So much for Libya’s oil being back on line! Overnight Libya's oil output went down 252,000 bpd after a shutdown at Sharara, a source at the National Oil Corporation (NOC) said on Tuesday according to Reuters.
Gold has been on a tear so maybe that was the incentive for someone to steal a 220-pound gold coin from Berlin’s Bode Museum. The coin is worth roughly $4.5 million.