September 5, 2024 | Weakening Consumption Of Energy Products In The US & China Drives WTI Below US$70/b. We Are Nearing An Important Price Bottom.

Weakening demand in China and the US for energy products accompanied by a shrinking of the Israel/Hamas/Hezbollah/Iran war premium has driven WTI down to as low as US$69.15/b today (last US$69.40/b). This is US$5/b below last week’s level and is nearing our bottom target of US$66-69/b. Once this occurs it would be the first of our three BUY indicators to be signaled and we will send out new SER Action BUY ideas to paid subscribers.

The Fed noted at their Jackson Hole retreat that the next move would be a cut in the Fed Funds rate at their upcoming FOMC meeting on September 17-18. The official announcement and the press conference occur on the 18th. Right now the forecasters are expecting between a 25 to a 50 BP cut, with the larger cut occurring if the jobs data out tomorrow is disappointing. More concern is coming out that the US may already have entered a consumer recession. Dollar General reported poor results and negative guidance from its discount store system as its customers are buying less (it said financially constrained) and at lower price points. The stock over the last week has fallen from US$127 per share to US$78 per share or down by 39%. Even high end fashion and jewelry retailers are seeing weaker sales so this is not just a lower income issue. The stock market decline and high end real estate softening is now causing retrenchment on spending.

Some of the recent global economic data points to consider are:

• On the good side Q2/24 GDP grew 3.0% quarter over quarter. The GDP price index rose 2.5% versus the forecast of 2.3% and the Q1/24 data of 3.1%.
• The Fed’s favourite inflation measure Core PCE rose at 2.6% the same as the prior month.
• AI profits appear to be elusive and the hype and valuations in the sector are getting slammed. After two years of hype, investors are now questioning when companies will make money from their US$Billions of spend. Over US$400B has been spent so far. The AI semi stocks are getting the brunt of the selling.
• The ADP report on the job market came out today and the rise was a miniscule 99K new jobs. The US Government jobs data comes out tomorrow and the forecast is for a rise of 161K jobs. This would be a better reading than the 114K jobs in July. It may be a worse number than the forecast as the JOLTS data (Job Openings data) showed only 7.67M job openings in July versus the 8.1M expected. If jobs tomorrow come in less than 100K then the market will want a 50 BP cut. That could be damaging for the stock market as a slowing economy or recessionary economy would likely see much lower earnings. Add to this multiples shrinking and we could see a 10-15% decline in the US major averages.
• The Bank of Canada lowered its benchmark rate by 25 BP (its third in a row) due to the slowing economy.
• China’s manufacturing PMI fell again. The survey expected 49.5 but it came in at 49.1. Month after month we are seeing weaker data out of China and their demand for commodities is declining including for crude oil.

Summarizing – We surmise that the Fed is boxed in by their policy mistakes. They kept saying in 2023 that inflation was transitory and we now know this as false. They also erred by prematurely calling a pivot in December 2023.  Recession may now be here and consumers are spending less while still facing an onslaught of higher prices making household budgeting tighter. We are likely in the early stage of a consumer recession which is nearly 70% of the US economy. Not a good situation during an election year.

Market Update:  We are watching the economic data carefully as it appears that consumers are tapped out and this seems to be dragging economies around the world into recession. The offset for the US is the 6% US spending deficit and large war spending that are keeping some areas of the US, with hot economies. The military industrial complex and areas where weaponry is built are strong economic centers these days.

We see the Dow Jones Industrials falling to the 36,000 level from 40,608 today.

Energy stocks peaked in early April of this year as crude reached its high of US$87.67 on the mideast war potential to expand with direct fighting between Israel and Iran. Prices retreated to US$71.46/b in mid-August as no escalation occurred and global inventories grew. The war fears have evaporated as we talked about and WTI crude has fallen below US$70/b. From here we see one more downphase to a bottom in the US$66-69/b level. When this downthrust occurs we expect to swing to a fully bullish posture again and send out new SER Buy Recommendations.

Josef Schachter September 5th, 2024

Posted In: Schachter's Eye On Energy

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