Unmasked
Global economic worries continue to rise post Brexit as it seems the lack of direction in the UK is unmasking festering problems in the EU banking system. Last week the talk surrounded Deutsche Bank (DE:DBKGn), HSBC (NYSE:HSBC), and Credit Suisse (SIX:CSGN) that was called by the International Monetary fund the riskiest financial institutions in the world. This week the focus is on bad debt at Italy’s oldest bank and other Italian banks that got hammered on fears that the Italian bank bailout fund might not be big enough to bail out all of the bad loans.
Those fears created a risk off scenario as traders scrambled to find safe harbor. The drive continues as gold surges to a two year high and a rush to government securities that are breaking record low yields across the globe. For example, Japan’s 20-year government bond yield went negative to a record low and German bund yields fell below -02%. The markets seem to be pointing to increasing odds of a global recession which does not help the outlook for oil prices.
Oil prices saw some extra pressure when private forecaster Genscape reported that supply in Cushing, Oklahoma may have increased by 230,000 barrels. That was a surprise. We also saw RBOB gasoline futures tank as we passed the summer demand peak of the Fourth of July holiday and the perception that if the economy weakens further, we may see gasoline demand falter.
Of course a drop in oil prices may cause a reversal in the recent increase in rig counts that seem to be gaining a little momentum. We will see how strong that trend might be if prices continue to falter.
Some are suggesting that crude oil might at some point act as a safe haven play as it may actually be better than gold because it has more uses. Yet with turmoil around the globe, it is the metals that are preforming. Not only gold and silver but even nickel hit a nine month high. You would think it would be counter intuitive if we are going into a recession but we have seen nickel demand exceed expectations as production was cut back and a recent mine closing in the Philippines is causing a potential supply deficit.
Oil may attempt a rebound as the drop may have been overdone. The real concern for the big picture is how this turmoil will impact energy investment. Short term turmoil will lead to long term opportunity. In the mean time, short term trades are recommended on both the long and short side. Long term look for breaks to beef up the back end of the curve.
Natural gas retreated big time as a report on production sent buyers running for cover. The Wall Street Journal reported a rebound in production since the start of July. U.S. natural gas production so far this month has averaged 70.8 billion cubic feet a day, according to Platts Analytics, an increase of 350 million cubic feet a day from June’s average.
Still with the increase we will see the potential for record demand as power plants will burn record amounts of gas. While there has been some moderation in the heat forecast we should continue to see below normal injections into storage.
With oil we will be using trade levels intraday. For natural gas we will be looking to get long and use option strategies. The Brexit fall out will play havoc with oil but the long term bottom cycle is firmly in place. Market turmoil will lead to less energy investment not more, that is a critical point as the historic cutback in investment in the space is already going to create long term damage to the supply side of the equation.