Energy companies led U.S. stock indexes lower Monday as the price of crude oil declined. Phone company and materials stocks were also among the big decliners. Investors were weighing the latest batch of company earnings news.
The Dow Jones industrial average fell 19.04 points, or 0.1%, to 20,052. The Standard & Poor’s 500 index fell 4.86 points, or 0.2%, to 2293, as the broad-based index snapped a three-day winning streak. The Nasdaq composite index fell 3.21, or 0.1%, to 5664, as the tech-heavy index pulled back from Friday’s record closing high.
Benchmark U.S. crude fell 82 cents, or 1.5%, to close at $53.01 a barrel in New York. Brent crude, used to price international oils, lost $1.09, or 1.9%, to $55.72 a barrel in London.
Several energy companies were trading lower. Devon Energy slid 3.2%, while Chesapeake Energy dropped 3%. Marathon Oil shed 4.1%.
The 10-year Treasury yield fell to 2.42% from 2.47% late Friday.
Investors are still cautious as Trump’s early acts as president have been shaping markets for the past couple of weeks. On Friday, Trump directed the Treasury Secretary to look for potential changes to the Dodd-Frank law, which reshaped financial regulations after the 2008-09 financial crisis. Investors applauded that move but remain uncertain about the future impact of other policies. Over the weekend, the U.S. immigration ban on refugees and travelers from seven Muslim-majority countries was blocked by a federal judge and an appeals court turned down a Justice Department request to set that judgment aside. The White House said it expects the courts to restore executive order, which was founded on a claim of national security.
Saudi Arabia’s oil minister said that the supply cuts agreed by Opec and non-Opec countries at the end of last year may not need to be extended beyond June, as rising demand and strong compliance should have pushed the market towards balance by then.
Khalid al Falih, speaking at an industry event in Abu Dhabi, struck a bullish pose saying the cuts, which began on January 1, would have their “full impact by the first half” of 2017.
“We don’t think it’s necessary given the level of compliance…and given the expectations of demand,” Reuters reported.
“Based on my judgement today it’s unlikely that we will need to continue (the agreement) – demand will pick up in the summer and we want to make sure that the market is supplied well. We don’t want to create a shortage or squeeze.”
He added, however, that the group could still extend the six-month deal “if there was a need”.
Brent crude, the international oil benchmark, was up 38 cents at $55.83 a barrel by 10am London time while US benchmark West Texas Intermediate gained 32 cents to $52.69 a barrel.
Stocks dipped Thursday but finished off early, sharp lows, giving back gains from the day before.
The Nasdaq composite, off 0.3%, snapped a seven-day winning streak and posted its first loss of 2017.
Losing as much as 180 points earlier, the Dow settled for a 63-point loss, 0.3% lower, to 19,891 even. The S&P 500 slipped 0.2%.
Financial, industrial and technology stocks were down the most, while phone company and real estate stocks edged higher. Investors were turning their focus to the next wave of corporate earnings reports in the weeks ahead.
Banks and other financial companies were down as the yield on the 10-year Treasury note fell. Lower yields mean lower interest rates on loans and lower profits for banks. The yield on the 10-year Treasury slipped to 2.35% from 2.37% late Wednesday.
Benchmark crude oil finished up 76 cents, or 1.5%, to $53.01 a barrel in New York.
In Europe, Germany’s DAX ended down 1.1%, while France’s CAC 40 lost 0.5% despite new data showing eurozone industrial production jumped 1.5% in November. Britain’s FTSE 100 ended flat. In Asia, Japan’s benchmark Nikkei 225 dropped 1.2%. Hong Kong’s Hang Seng dipped 0.5%, while Australia’s S&P/ASX 200 slipped 0.1%. South Korea’s Kospi bucked the trend to rise 0.6%.
Oil prices surged to their highest level since July 2015 on Monday raising concerns about inflation and helped push the US 10-year Treasury yield above the 2.5 per cent mark.
The yield on the US 10-year, which moves inversely to price, climbed above 2.5 per cent for the first time in two years to 2.5005 per cent.
“The bearishness in the bond market is even more acute than the bullishness on equities,” David Rosenberg at Gluskin Sheff, said.
He added: “A wall of money is exiting the bond market into the stock market — bond fund outflows in the past five weeks are at the highest in three-and-a-half years.”
Alongside energy prices, Peter Tchir at Brean Capital also said the weakness in Japan “is concerning to global bond investors”. He noted the Bank of Japan had pledge in September to keep the 10-year yield on the Japanese government bond at or below zero per cent. Instead, the JGB is now at nearly 0.8 per cent. That “might be an indication of Central Banks losing their ability or willingness to suppress interest rates,” he said.
Despite the run up in oil prices, the S&P 500 was down 0.1 per cent to 2,257.67, while the Dow Jones Industrial Average was flat at 19,760.14 — less than 300 points shy of breaching the 20,000 level. The Nasdaq Composite was down 0.5 per cent to 5,420.70.
Investors appear to be pausing for breathe following the sharp run up in stocks in recent weeks.
A deal is better than no deal, but just how good is Opec’s first agreement to limit production since the financial crisis?
To recap: In Algiers on Wednesday, the world’s major producer nations agreed on their first co-ordinated effort to control supply since 2008 and sent oil prices duly soaring by 6 per cent.
Details, including country-specific targets, will be released on November 30 but analysts and Opec-watchers have already raised concerns about how the burden to cut production will be spread and the prospect of backsliding among Opec’s members.
Here’s a round-up of what they make of it all.
The Algiers meeting is something of a “false dawn” says Hamza Khan, head of commodities strategy at ING who says the cut is still a shadow of the 1.5m b/d cut agreed in 2008. It will also pose problems for some Opec’s dissenters – including Iran, Nigeria and Libya, he added:
Saudi Arabia could have shouldered the bulk of cuts, likely reducing output of heavier blends from the Wafra oil field.
But the kingdom’s new crown prince and oil minister have been vocal about the prospects of a Saudi Aramco IPO in 2017/18, and such discretionary cuts would hurt investor confidence in such a listing.
Russia at the moment does not appear to be part of the agreement and continues to pump at record levels.
Analysts at Morgan Stanley have also doused a good deal of cold water on the deal, claiming the intervention is “not as good as it sounds” with execution still posing a major problem.
Results from two of China’s biggest energy majors have once again highlighted the painful toll persistently weak oil prices are taking on profitability.
PetroChina, the country’s biggest oil and gas producer, said net profit dropped 98 per cent in the six months to June 30 to Rmb 531m ($79.8m) on revenue 16 per cent lower to Rmb 739bn. Rival Cnooc, meanwhile, fell to a 7.7bn net loss in the first half. This compared to a Rmb 14.7bn profit during the first half of 2016.
PetroChina said the average price for North Sea Brent crude oil and WTI, the US benchmark, were $39.81 a barrel and $39.64 a barrel respectively during the period, down 31.2 per cent and 25.6 per cent respectively on the same six months a year ago.
Cnooc’s chairman and chief executive, Yang Hua, remains cautious about the outlook for the oil market, despite an improvement since January, when Brent crude fell as low as $27.88 dollar a barrel.
The Bank of Russia has kept rates on hold at 10.5 per cent, a month after its first cut in almost a year.
In June the bank lopped 50 basis points off its benchmark rate after holding it steady at 11 per cent since last June.
A sharp decline in inflation over the last year – from more than 15 per cent during much of 2015, to 7.5 per cent in June – has given the bank some breathing space.
There has been some concern over the rouble’s surprising strength. Even as Brent crude has plunged 20 per cent since early June, the Russian currency has been flat against the dollar over the same period.
The rouble has been one of the strongest performing currencies this year, gaining 17 per cent against the greenback year-to-date, which has lead some analysts to point to the substantial premium Russian rates offer over lower rates elsewhere.
Piotr Matys of Rabobank said the main argument in favour of a rate cut today was “that the substantial interest rate differential should be narrowed to reduce the risk of excessive currency appreciation over the mid-term”.
”Two oil and gas producer defaults have propelled the energy high-yield default rate to a record 13%, surpassing the 9.7% mark set in 1999,” Fitch Ratings said in a press release adding that the default rate among US oil companies may rise further to 20 percent by the end of the year.
The ranks of bankrupt US energy companies were swelled by Ultra Petroleum and Midstates Petroleum on Monday. Struck by the persistent slump in oil prices, the two companies had accumulated nearly $6 billion in combined debt before filing for bankruptcy protection in Texas.
Global oil prices plunged from $115 to less than $30 per barrel between June 2014 and January 2016, hitting their lowest levels since 2003 amid an ongoing glut in global oil supply. The prices have since recovered to around $40-45 per barrel for the Brent crude benchmark.
Commodities from iron ore to aluminium have rallied this week driven by a sharp recovery in oil, signs of stronger growth, and a wave of trading on China’s exchanges.
Oil prices have risen for three straight weeks to top $45 a barrel. Many traders now expect the market to balance in the second half of this year following almost two years of oversupply — with recent low prices cutting into US output, slowing drilling worldwide, and bolstering demand.
“The world will start to slowly swing into a crude oil deficit from June onwards,” said analysts at Energy Aspects in London, although they cautioned large inventories built up since mid-2014 will cap the rally.
While oil prices remain at less than half the $100 a barrel level they averaged between 2011 and 2014, Brent crude is now 60 per cent higher than this year’s low under $30 a barrel in January.
Oil’s resilience was keenly demonstrated this week, when prices held firm even after the collapse of talks among leading producers in Doha aimed at freezing output. Brent dropped as much as 7 per cent when markets opened on Monday, they then climbed steadily through the week, hitting a five-month high of $46.18 a barrel.
Other natural resources have tracked oil higher as its bounce has been taken as a signal that growth is not as weak as some feared.