The U.S. stock and energy markets gave up on Friday some of the big gains that they made after the Federal Reserve announced the first interest rate cut in four years. The U.S. central bank announced a larger-than-usual half-percentage-point reduction, with Fed Chair Jerome Powell managing to thread the needle to suggest the deeper-than-usual cut was just a “recalibration” of policy and not a move meant to prevent a recession. The broad-based rally saw the S&P 500 jump 2.0%; the tech-heavy NASDAQ Composite gained 2.9%, the Dow Jones Industrial Average increased by 1.48% while the Russell 2000 Index added 2.2%. Meanwhile, the oil and gas benchmark, Energy Select Sector SPDR Fund (NYSEARCA:XLE) gained 2.1% on the day, with the recent oil price rally maintaining momentum.
Oil prices are on track for the biggest weekly advance since February following a steep interest-rate cut by the Federal Reserve, while traders continued to monitor tensions in the Middle East. Brent crude for November delivery was trading at $74.76/barrel on Friday’s intraday session at 13.15 pm ET up from $71.80 a week ago while West Texas Intermediate crude for October delivery was changing hands at $72.35/barrel from $68.84. The oil price rally kicked off a week ago thanks to largely unjustified extreme bearish positioning by money managers.
Over the past couple of weeks, oil markets have been marred by a storm of top-down macroeconomic fears that fed momentum-following algorithms, resulting in an extended oil price fall exacerbated by a final stage of gamma hedging by banks. The overwhelming bearishness among money managers took positioning in crude oil and oil products to the most bearish extreme since the start of the Global Financial Crisis (GFC) in 2008. commodity analysts at Standard Chartered predicted that the extreme bearishness skewed oil price risks to the upside, pointing out that the extremes in speculative positioning warrant a larger short-covering rally.
“The market concluded that a sub-$70 level combined with hedge funds holding a record weak belief in higher prices of crude and fuel products would require a recession to be justified, a risk this week’s bumper U.S. rate cut helped reduce,” Ole Hansen, head of commodity strategy at Saxo Bank, said.
In the energy sector, EV maker Tesla Inc. (NASDAQ:TSLA) made the biggest gain at 7.3%, with lower interest rates likely to benefit car stocks since it makes car financing more affordable, easing companies’ need to lower prices and increasing demand. Increasing competition mainly from Chinese EV manufacturers have led to deteriorating profits and margins for Tesla despite sales volumes remaining healthy. On July 23, the electric vehicle giant reported that Q2 earnings fell 43% to 52 cents per share. Meanwhile, quarterly revenue totaled $25.5 billion, up 2% vs. the year-earlier quarter.
Meanwhile, stocks of Big Oil companies also enjoyed a bump following the big rate cut: Exxon Mobil Corp. (NYSE:XOM)+2.4%, Chevron Corp.(NYSE:CVX)+1.7%, Marathon Oil (NYSE:MRO)+1.7%, Shell Plc (NYSE:SHEL)+ 1.5% and BP Plc (NYSE:BP)+2.3%.
Interest rate cuts typically boost economic activity and energy demand. However, Wall Street is warning that this might take longer to materialize given the current global macroeconomic weakness,
“U.S. interest rate cuts have supported risk sentiment, weakened the dollar and supported crude this week. However, it takes time until rate cuts support economic activity and oil demand growth,” said Giovanni Staunovo, an analyst at UBS.
The mid-term oil price outlook remains healthy, with StanChart predicting an oil supply deficit in the coming months. September is on track to become the tightest month of the year due to seasonal demand strength and supply outages in Libya, as well as the U.S. Gulf. StanChart has predicted that Libyan oil might take longer-than-expected to return to the markets. According to the analysts, the nuances of the recent negotiations were significantly more complicated than market commentary had implied.
Little substantive progress has been made after two rounds of negotiations, with the experts reporting that Libyan crude oil exports clocked in at 550 kb/d, roughly half the pre-crisis level of about 1.2 million barrels per day (mb/d). StanChart sees the reduction in output lasting significantly longer than the market is currently expecting, suggesting that the market has got ahead of itself in pricing the immediate resolution of an actually unresolved crisis.
Further, Russia, Iraq and Kazakhstan have submitted their compensation plans to the OPEC Secretariat for overproduced crude volumes for the first six months of 2024. StanChart has worked out that adding the compensation schedule to the recently announced reduction in targets due to delaying the implementation of tapering will result in OPEC production clocking in at 530 kb/d lower in Q4-2024; 540 kb/d lower in Q1 and Q2-2025 and 560 kb/d lower in Q3-2025, if all commitments are kept.
By Alex Kimani for Oilprice.com