THE OIL INVENTORY SURVEYS WERE A SHOCKER!

Wow!   Depending upon the oil inventory survey, inventories last week declined between14.5 and 12 million barrels versus an expected increase of between 905,000 and 225,000 barrels, respectively.  This was the largest drawdown in either 17 or 30 years respectively and was the greatest “miss” in history.

Is this data wrong?  My immediate thought is that some organization did not report and next week the data will reflect such correction.  However it appears this is not the case.  Some are suggesting the large drawdown was the result of tropical storm activity in the Gulf of Mexico that shuttered some capacity.

I must caution all that weekly inventory surveys are notoriously volatile but as noted the difference between the forecasted increase and the actual data is the greatest on record.

I am certain if next week’s statistics reflect a similar decline, the bearish oil narrative will dramatically change to perhaps one of a possible crude shortage.

In many regards this should not be a surprise given the record amount of western oil infrastructure cuts (amounting to over $350 during the last 20 months) and supply disruptions from Nigeria, Libya and Venezuela.

Moreover, the seven largest oil companies replaced only 67% of oil used in 2015 and 56% of the oil consumed in the first six months of 2016 according to the EIA.   Historically the “oil majors” replace around 110%-115% of oil consumed.  Additionally global demand is a record.

What happens if the oil narrative changes dramatically to one of possible demand pull/cost push inflation?  As noted many times there is over $17 trillion of sovereign debt that has a negative nominal interest rate.  According to the Bank of England the last time negative interest rates were this prevalent was over 5,000 years ago  (Note:  I do not have a clue as to how the BOE evolved at this statement)

Approximately 35% of US Treasury debt is owned by the Federal Reserve, the result of QE.  What happens if yields rise, the result of possible inflationary pressures because of oil?  Will monetary velocity suddenly accelerate stoking yet even more pricing pressures?

Wow!  These comments are about a ludicrous as one’s suggesting Donald Trump would be the Republican nominee in July 2015.

Equites would have been considerably lower if it was not for the advance of oil shares.  Generally speaking, stocks followed bonds after the ECB downplayed the need for more economic stimulus.

Last night the foreign markets were down.  London was down 0.43%, Paris down 0.62% and Frankfurt down 0.47%.  China was down 0.73%.  Japan up 0.04%and Hang Sang up 0.75%.

The Dow should open moderately lower ahead of several speeches given by Federal Reserve officials.  I do not think they will cover anything new given the upcoming Fed meeting and the recently released Beige Book.  The 10-year is off 13/32 to yield 1.65%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.