WTI crude oil jumped 5.18% to $37.74 per barrel on Wednesday, April 6th, 2016. The positive news that crude oil inventories fell by more than expected was welcomed by oil markets. The sharp uptick in crude oil prices – $1.86 – dragged the commodity out of the mire, and this helped to relieve the beleaguered equities markets which have been under pressure of late. Wednesday’s gains were the best in 3 weeks since mid-March 2016. The price of WTI crude oil was boosted by increased demand from US refineries.
According to the EIA (Energy Information Administration), oil inventories declined by 4.9 M barrels for the week ending Friday, April 1st. This is in sharp contrast to the consensus forecast of analysts who were expecting a rise of 2.9 M barrels on the first Friday of April. There was also positive news from the API (American Petroleum Institute) which reported a drop of 4.1 M barrels of oil. US oil refineries have been utilizing increasingly greater quantities of crude oil week on week, with 199K + more BPD being consumed. The operable capacity for the week ending Friday April 1st was 91.4%.
How oil prices are helping equities markets on Wall Street
The positive correlation between oil price strength/weakness and equities markets is undisputed. The S&P 500 index is one of the most closely correlated indices with oil prices. Gains in the price of WTI crude oil on Wednesday, April 6th 2016 were largely a result of US inventories being lower than expected. However, there is also an equal but opposite force weighing on oil markets in the form of the upcoming conference in Doha. Saudi Arabia as the leading OPEC country, along with others, will be hosting Russia, a non-OPEC country, to discuss ways and means of reducing output to January levels. However, hopes of a quick resolution to the oil price dilemma were dashed when Iran and Saudi Arabia both announced that they were unlikely to follow through with cutting production levels of crude oil unless all participants in OPEC and non-OPEC countries did the same. Since Iran will not be reducing its output, Saudi Arabia has announced that it too will be avoiding such a measure.
Wall Street rallies with uptick in oil prices but gold falls short
Strength in crude oil demand put a damper on gold demand, but equities markets rallied. The Fed minutes that were released at 14:00 EST confirmed what everyone already knows: a go-slow approach to rate hikes will be the norm in the US for the remainder of 2016. Janet Yellen as Chair of the Fed has been cautiously optimistic about rate hikes, but wants to see the fundamentals in the global economy improving before the US adopts a 25-basis point rate hike. According to the FFF (Fed fund futures), there is only a 50% likelihood of the Federal Reserve Bank hiking interest rates in 2016. This is positive news for equities markets, but bad news for the USD.
The greenback continues to weaken against a basket of currencies, although it is performing well in its G-10 category. In terms of gold, the SPDR Gold Shares (NYSE:GLD) gold trust was markedly lower by 0.7%, while 6.6 metric tons of gold outflow was reported for gold exchange traded funds. Gold was last trading at $1,225.20 per ounce on the COMEX, while silver was trading at $15.052 per ounce on the COMEX, and platinum was trading at $944.50 per ounce on the NYMEX.
The fact that oil prices have been range bound for quite some time is a result of talks of a production freeze. The meeting will be taking place on Sunday, April 17th 2016, but expectations remain low.